A Golden Opportunity in the Health Trends of Boomers
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A study recently published in JAMA Internal Medicine compared the health of the baby boomers to the health of their parents, finding that baby boomers are sicker. While some of this may be a matter of more advanced medical care, it doesn't really matter. A massive generation of sick people will be big business for some healthcare companies.
Studying the Boomers
Nicole Ostrow recently wrote on Bloomberg: "Baby boomers have more chronic illness and disability than their parents, as their sedentary habits and expanding girth offset the modern medicine that enables them to live longer, a study said." The study in question, published in JAMA Internal Medicine, compared the U.S. National Health and Nutrition Examination Surveys from both the baby boomers and their parents, looking at “lifestyle, health status, presence of chronic disease and disability.”
The results weren't too good, for the boomers, anyway. The three big take aways of the study were that there was more obesity among baby boomers, the group had a higher incidence of high blood pressure and high cholesterol, and boomers were more likely taking medications to treat their various ills. While this is a sad state of affairs on some levels, it is also an investing opportunity.
There are two companies that are in line to benefit from the fight against obesity, Weight Watchers (NYSE: WTW) and NurtiSystem (NASDAQ: NTRI). The two companies navigate very different paths in their efforts to help people.
One of the most distinguishing aspects of Weight Watchers' business model is the community it builds. Keeping on track can be one of the hardest parts of loosing weight, so the regular meetings the company offers allowing customers to help each other, creates a stickiness that other companies simply can't replicate. Particularly in light of Weight Watchers' brand recognition and its large network of stores.
The Weight Watchers brand has such a powerful presence that the company has been able to partner with restaurants and food processors, giving a “seal of approval” to select foods. That's a huge statement to how well received the company is. Longer term, government and business arenas offer potential. Indeed, as weight management becomes an increasingly important health concern, it is likely that spending by these two broad groups will increase. Weight Watchers is an almost turnkey solution.
NurtiSystem sells specifically designed weight management food programs. Meals are sold over the Internet, by phone, and through the retail channel, and largely delivered directly to customers' doors. Unlike Weight Watchers, which allows participants to eat their own food but track it with a proprietary point system, NutriSystem controls just about every aspect of the eating process. It's a good option for those who simply “don't know how” to eat.
NutriSystem offers weight loss coaches and weight management systems, but it simply isn't the same as Weight Watchers. Without that impetus to come back again and again, Nutrisystems' revenue depends heavily on people buying food on their own. With the economic downturn between 2007 and 2009, and the slow recovery since, this point has been an issue. However, die-hard customers become annuity-like income streams.
Financially, Weight Watchers has been a better performer of late. This shouldn't be surprising in a weak economy, where purchasing specialized food would be considered a luxury. However, should the economy improve, results at NutriSystems would be more highly leveraged to the upside. A relatively large dividend might be tempting, but if results don't turn around it could be at risk of a cut.
Addicted to Drugs
With two notable chronic illnesses, high blood pressure and high cholesterol, and a propensity to taking drugs to deal with these problems, the baby boomers are a veritable gold mine for drug companies. However, some of those companies have seen their day in the sun. For example Pfizer's (NYSE: PFE) Lipitor was a massive success for the company, raking in billions over the years.
The problem is that pharmaceuticals only receive patent protections for a limited period of time. The entire industry has been dragged down by the so-called patent expiration cliff. Indeed, after exclusivity ends, many drug companies watch helplessly as generic versions of their product essentially take over the market the proprietary drug once owned. Sales very quickly head toward zero while the generic version's sales head nicely higher.
Complicating this for the Pfizer's of the world will be the increased focus on keeping medical costs in check. The U.S. government is aggressively working to reshape healthcare and it will materially alter Pfizer's business. That said, drugs will continue to be a treatment option of choice, but there will be a push for lower costs and the use of generics. Since there is already a well received collection of drugs to treat both high blood pressure and high cholesterol, and most are either off patent or soon to lose patent protection, investors should probably look at generic drug manufacturers, pharmacy benefit managers, and drug stores.
On the manufacturing front, one of the largest and most respected names is Teva Pharmaceuticals (NYSE: TEVA). The company, which is leading generic drug company in the United States and Europe, holds the number three spot in Japan, and has been working to expand in markets around the world with Russia and Latin America being high growth regions for the company. While there is price pressure in the generics world, volume is an important metric, too. With more and more baby boomers taking medications for chronic illnesses, Teva is likely to see sales increase.
An interesting aspect of Teva, however, is that it is using its cash cow business to branch out. For example, it purchased Cephalon’s branded drug business, giving it a noteworthy position in that market and, more importantly, a pipeline of drug candidates. The branded drug business tends to be benefit from much higher margins, so this is a logical move for Teva. It is also working in the over the counter space with consumer products giant Procter & Gamble, which should help provide a stable foundation for its other businesses.
On the drug store and pharmacy benefits manager front, going with CVS Caremark (NYSE: CVS) provides a one-stop shop. The company has more than 7,000 CVS stores across the country, has over 60 million pharmacy benefit management “members”, and has been extending the reach of its in-store clinics in recent years (it has over 600). Clearly, the company touches every aspect of the healthcare market, including diagnosing patients, selling over the counter remedies, selling prescription pharmaceuticals, and servicing group purchasers via Caremark. You can also buy a candy bar and some milk, while you're in the store.
CVS' management is well aware of the changing shape of the healthcare market in the United States. It expects Medicare and Medicaid to be paying for up to two thirds of all prescriptions over the next decade or two. The baby boomers are, clearly, the driving force behind this. Seeing the writing on the wall, the company is trying to position itself to both provide a vast suite of products and services and, at the same time, to be one of the lowest cost providers.
Generics will be a key part of this because they help to keep drug costs down. This is good for the PBM business and the CVS pharmacy business because generics tend to provide higher margins than branded drug sales for the retailer. Indeed, the bulk of the profits in the branded drug space go to the drug companies. Moreover, with its massive size, CVS Caremark has a lot of leverage to push for lower prices from its suppliers. On this, it is important to note that while the top line may be lower with increased generic sales, the bottom line will be fatter, so in the years ahead, earnings will likely be more telling than sales.
Take Care of Yourself
Clearly, the research suggests that baby boomer investors should take care of themselves. However, it also suggests that there are some investment ideas to take advantage of if you want to make money. Obesity and increased use of drugs to treat chronic illness are easy enough to target.
Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. 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!