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Healthcare

Drug Stocks Offer Long-Term Investment Opportunities

In  a recent article I wrote that U.S. public healthcare spending is projected to exceed private spending by 2012. U.S. healthcare expenditures was estimated to reach about 17.3% of the GDP in 2009. One of the beneficiaries of all this spending are the companies in the healthcare industry such drug makers, health insurers, etc. They all may perform well in the coming years.

The table below lists the major drug stocks trading on the NYSE:

AstraZeneca plc, GlaxoSmithKline plc, Novartis AG and Tongjitang Chinese Medicines Co. are the four foreign drug companies in the list. U.K-based AstraZeneca (AZN) is the owner of many top selling drugs including the “purple pill” Nexium which is used for the treatment of Gastroesophageal reflux disease (GERD). Currently AZN offers a 7.75% dividend yield. GlaxoSmithKline (GSK) is another British giant whose products are sold in over 150 countries. GSK pays a 6.02% dividend. Switzerland-based Novartis(NVS) had sales of over $45B last year.Tongjitang Chinese Medicines Co (TCM) is a specialty drug company that is engaged in the manufacture of modernized traditional Chinese medicine.

Among the U.S. companies, Johnson and Johnson(JNJ) is by far the largest maker of a wide range of healthcare products. JNJ was founded in 1886. The stock is a high quality long-term consistent performer. Form JNJ’s investor site:

“Our consistent performance has enabled us to deliver an exceptional track record of growth that few, if any, companies can claim: 76 consecutive years of sales increases; 25 consecutive years of adjusted earnings increases; and 47 consecutive years of dividend increases. Over the last 10 years, Johnson & Johnson stock generated a 5.6 percent total return for investors compared to a -1.4 percent total return for the S&P 500.”

U.S. Public Healthcare Spending To Exceed Private Spending

The U.S. spends the highest amount for healthcare on a per-capita basis than other OECD member countries. Soaring health care costs continue to be a major concern for ordinary Americans.

In Public Health Tab to Hit Milestone, The Wall Street Journal notes that “For the first time, government programs next year will account for more than half of all U.S. health-care spending, federal actuaries predict, as the weak economy sends more people into Medicaid and slows growth of private insurance.”

Public spending accounted for 47% of the total health-care spending in 2008. Federal actuaries had predicted earlier that the government spending would cross the 50% mark by 2016. However they now predict that by 2012 public spending would exceed 50%.

Chart:

The main reasons for the rise in public health spending are:

• The economic recession
• Rising unemployment
• Changing demographics
• Baby-boomers retiring

The U.S. total heath care expenditures was estimated to reach $2.5T in 2009 accounting for 17.3% of GDP. Despite the decline in GDP health-care spending rose by 5.7% last year. Health-care spending is projected to increase to $4.5T in a decade.  As the number of unemployed people increases, they lose their private health-care benefits and some try to enroll into the Medicare and Medicaid. This is causing a rise in enrollments in those public programs.The Medicare program for poor people is projected to see a 5.6% rise in enrollments this year. Last year medicare expenses are estimated to have reached a whopping$507B.

Enrollments in private health-care plans is estimated to decline again this year due to the continued high unemployment levels and expiration of subsidies for the COBRA plan.

Sluggish growth in the job market, stagnant/declining wages in the private sector and rising health-care costs do not bode well for the future of U.S. economy.