Invest In Demographics
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
America is getting older; there is no doubt about it. The Department of Health and Human Services Administration of Aging says that in 2000 those 65 and older made up 12.4% of the US population. By 2009 that had grown to 12.9%, and by 2030 19% of the US population will be 65 or older. That means that there will be 72.1 million Americans who are 65 or older. According to Healthcare Facts By James D. Agresti, the average US citizen spent $5,276 on healthcare in 2004. Those in the 65-74 range spent $10,778 a year, in the 75-84 range they spent $16,389 a year, and in the 85 or older range they spent on average $25,691 a year on healthcare. While this is from 2004, it shows you just how much more older people spend on healthcare than younger people. This is huge for companies in the healthcare industry, as it means their incomes are about to grow. One way to play this demographic is ....
Merck & Co (NYSE: MRK)
Merck is a global pharmaceutical company that makes tons of products that older people use. For example, in May 2006 the FDA approved Zostavax, a vaccine used to treat shingles for those 50 and older. So far there is no other shingles vaccine on the market. In 2011 Zostavax had revenues of $332 million, but some see that going up to over $1 billion in the next few years. From the Wall Street Journal,
"(a)ccording to the FDA-approved Zostavax prescribing label, Zostavax reduced the rate of shingles by 51% versus a placebo in a clinical trial of people ages 60 and older, and by 70% in a separate study of people 50 to 59."
While Merck's patent protection won't last forever, we can already see them benefiting from the aging population and that is why Merck is a good aging demographic play. Merck also has a drug called Anacetrapib under development, which could be used to treat elevated cholesterol levels and prevent cardiovascular disease, both of which are prevalent in the older population. One part of the phase 3 study ends in 2017. In 2009 over 543,000 people over the age of 65 went to the hospital for an irregular heartbeat according to aarp.com. Both of these drugs, and many others, will enable Merck to both increase its revenues and have higher margins, which will boost its bottom line.
Merck lost patent protection on its blockbuster drug Singulair, which is hurting its growth right now as its other segments, like animal care and consumer care, grow at faster rates. With new drugs coming on the market that will have patent protection, which sport much higher profit margins (30-50%) versus those without patent protection (3-7%), and increased demand from more elderly patients, Merck is well positioned to see its EPS grow by 7-9% for the next few years. It may even see double digit growth as the baby boomer's start to retire within the next 10 years. Merck competes in a very competitive space, but at least in the shingles area it has the first mover advantage, demographic trends in its favor, and is patent protected.
Intuitive Surgical (NASDAQ: ISRG)
Intuitive Surgical makes the da Vinci Surgical systems, which help surgeons perform minimally invasive surgeries. Intuitive effectively has a monopoly on the human organ robotic surgery space. As people get older the number of surgeries performed in the US will go up, increasing demand for the da Vinci systems. While the da Vinci systems are expensive (around $1.5 million each), they have been shown to be very effective. According to the University Medical Center of Princeton, the da Vinci system causes less pain, less blood loss, less scarring, a faster recovery time, and better clinical outcomes.
Intuitive Surgical makes a lot of money performing maintenance on their machines that they sell (which is about 2,500 as of January 2013) and replacing/fixing parts of the robot. The company's instrument and accessory revenue grew 24% in Q3. Right now the robotic surgery market is a $1 billion a year industry, but Titan Medical (a Canadian medical company) sees that growing to $5 billion by 2015. ISRG, one of the biggest players in the industry, will benefit from increased adoption of robotic surgery in hospitals in the US and abroad. Another thing ISRG has going for it is moving into the single-site space. The benefits of a single-site (which means one incision) are both cosmetic and physical, because all you have is a scar on your belly button, which virtually is a "scar less surgery." Also your recovery time is faster and there is less risk of infection. Most patients would want a scar-less surgery and to have less risk of infection than to have a higher risk of infection and a longer recovery time.
MAKO Surgical Corp (NASDAQ: MAKO) competes with Intuitive Surgical in certain areas with its Robotic Arm Interactive Orthopedic system and does hip and knee replacements with better results (especially in the cosmetic area) than traditional surgeries, similar to ISRG. The biggest difference between these two companies is that Intuitive is profitable and has a market cap over 40 times the size of MAKO. While the company could eventually face more competition from the likes of powerhouse Johnson & Johnson, it currently dominates its sector so it can get higher margins from its maintenance and services division and sell more of its da Vinci systems due to lack of competition.
HCA Holdings Inc (NYSE: HCA)
Another part of the health care sector that will benefit enormously is the hospital industry. HCA Holdings operates 163 hospitals and 108 freestanding surgery centers. Older people are far more likely to go to the hospital with a major injury than younger people, even within the 65 or older group. According to hospitalmedicine.org, those who are 85 or older have twice the chance of going to a hospital than those in the 65-74 range. With an older population, more people will need to go to the hospital and HCA is willing and able to fill the upcoming extra demand. The more patients that HCA has, the more money it makes by selling out hospital rooms, providing surgeries, and doing scans/tests on more patients. Plus Obamacare means that HCA will take in less uninsured patients, so it will benefit from 2 fronts. HCA operates numerous hospitals in Florida, so it is strategically geographically located to benefit from the baby boomer's retiring. In regards to competition, there are only so many hospital beds to go around. A study from the Columbia Business School found that 90% of all ICU units have insufficient capacity, which means that HCA won't have to aggressively compete on price to win over patients due to supply issues.
While nobody wants to get old, everyone does. As investors we should look at big upcoming trends so we can get in before the rise in earnings and reap large returns earlier than those who wait. All three of these stocks will benefit from the shift in demographics and the future returns should exemplify how investing based on demographics can help boost your portfolio.
callumturcan has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical. The Motley Fool owns shares of Intuitive Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!