This Sector Is Your Best Investment Over the Next Decade

I admit it's sometimes difficult to look too far down the road when the market continues to head higher regardless of the economic news. My investments have fared well as of late, and anyone who's been an optimist over the past four years is probably doing well, too. But the market doesn't have much regard for the past; it's all about what's in the future that often drives stocks. That's why I want to look at a sector that's poised for big gains over the next decade: the health care sector.

I understand there's plenty of animosity toward the sector because of high branded-drug prices and a long, drawn-out, drug development process, but there are five reasons why health care represents your best investment choice over the coming decade rather than traditionally strong sectors like technology or financials.

1. Lab-based sequencing costs are falling dramatically
There is one primary reason why research costs are contributing to better drugs coming down our pipeline: Big technological advancements over the past decade.

Drug research all begins in the lab. According to the U.S. National Institutes of Health, there are more than 140,000 clinical studies currently under way. This figure has ballooned since 2000 as higher quality genome-sequencing equipment and better in-lab instrumentation has allowed researchers to conduct significantly more studies for the same previous cost.


Source: ClinicalTrials.gov, a service of the U.S. National Institutes of Health.

The chart above means a big boost in human genome sequencing demand for Life Technologies (UNKNOWN: LIFE.DL  ) . Life Tech introduced its Benchtop Ion Proton Sequencer in January last year for a price of just $149,000 and touted its ability to sequence the human genome in a single day for just $1,000. Previous versions had cost anywhere from $500,000-$750,000 and took weeks or months to sequence the human genome at a cost of $5,000 to $10,000 a pop.


Source: National Human Genome Research Institute.

As you can see, human genome sequencing costs have dropped through the floor, falling from north of $95 million in 2001 to less than $7,700 as recently as January 2012. The introduction of Life Technologies' Benchtop Ion Proton Sequencer should send these costs heading even lower. Note the correlation between these two charts as clinical studies soared when DNA costs began falling through the floor.

DNA sequencing is becoming increasingly important in cancer research, as sequencing tumors can lead to personalized therapy. Scientists at the Washington University School of Medicine in St. Louis, Mo., for instance, had fully sequenced 700 cancer patients' genomes, including healthy and cancerous cells, as of April last year, according to Science Daily. The lower cost of genome mapping and faster turnaround time will speed up the process of identifying mutations and could offer personalized cancer therapies in the not-so-distant future as opposed to a "one-size-fits-all" therapy.

Considering that health-care research budgets are only expanding, genome sequencing costs are falling, and that the sheer number of clinical studies being undertaken is rising, I can only assume that the next decade will see FDA approvals at a well-above-average rate than in the previous decade.

2. Follow the baby boomers
The 1990s and the first half of the 2000s was a generally good time for the financial sector as baby boomers earned a good living and had a lot of success investing their money. The train wreck that began in 2007 changed all of that, turning the financial sector into a veritable wasteland and hurting baby boomers more than any other generational class. With the first baby boomers (born 1946 to 1964) coming of retirement age in 2011, and roughly 10,000 boomers retiring each day from now through 2029, a boom in the health-care industry seems all but assured.

The Congressional Budget Office released a long-term budget forecast in June 2009 that projected that the cost of Medicare -- which is social health-care coverage offered to those age 65 and older, as well as younger people with disabilities -- would practically double from 3.5% of GDP in 2009 to 6.9% of GDP by 2035, about six years after the last group of boomers retires. Even more pressing, better treatments and healthier eating habits are greatly extending the lives of retirees beyond just the age of 65. Data from the Social Security Administration illustrates this point, with life expectancies beyond the age of 65 extending roughly seven or eight years for both males and females from 1940 through 2050. 


Source: Social Security Administration.

All facets of the health care sector appear likely to benefit from this trend of longer life -- from hospital and insurers, to pharmaceutical companies and medical device makers geared toward an aging population. One company that really stands out is Medtronic (NYSE: MDT  ) . If we simply extrapolate out the fact that cardiovascular diseases are the leading cause of death in this country based on PhRMA's research, then a dramatic jump in those aged 65 and older should lead to a large boost in pacemakers, stents, and valve replacements -- all markets that Medtronic operates in. Another area of solid growth that should be spurred by boomers is spinal implants, an area where Medtronic is the head honcho.

3. Obamacare will streamline the health-care industry
Regardless of whether you support the Affordable Care Act, one thing is for certain: It will bring millions of uninsured Americans under the fold of government-sponsored Medicaid. As I noted, the baby boomers were one of the hardest-hit groups during the recession, so they may be one of the primary beneficiaries of the beginning of Obamacare in 2014.

Obamacare definitely has its share of critics, but it's expected to bring approximately 16 million newly insured Americans under the scope of government-sponsored health care. These are people who previously either avoided going to the doctor unless absolutely necessary or put holes in the pockets of hospitals because of their inability to pay their health care service costs. In addition, Obamacare mandates individuals to carry -- and businesses to provide -- health insurance or face potential tax penalties on a per-person basis. 

Not surprisingly, no group of companies stands to benefit more from the streamlining of the health-care process more than hospitals. HCA Holdings (NYSE: HCA  ) , the nation's largest hospital operator, can, as a result of Obamacare, expect its bad-debt provision to fall dramatically. This should ultimately free up funds that can be used in other aspects of its business -- including acquisitions, funding future hospital construction, purchasing new medical equipment, and perhaps even paying shareholders a dividend.

4. Little threat of drug or device commoditization
One of the biggest threats of the technology sector is that everything is slowly being commoditized. From memory to assembly line parts, many technical components can now be duplicated with ease, placing long-term downside pressure of many technology companies' margins. The same can't be said about the majority of health-care companies.

It's true that generic drugs are a form of drug commoditization in the health-care industry, and their presence does threaten to drive down branded-drug developers' margins. However, with the drug development process shortening, as well as the presumption that in-lab research costs will continue to fall, the amount of new drugs that could find their way to market over the next decade could dwarf the number of drugs set to fall off the patent cliff. This should negate a significant portion of the gross margin pain often associated with the introduction of generic medications.

The effects against commoditization are even more readily apparent in medical device makers. Intuitive Surgical (NASDAQ: ISRG  ) , manufacturer of the da Vinci surgical system, offers the only commercially profitable surgical robotic system. Period! With few competitors on the horizon and an incredibly complex technology, I'd say its market share is safe for quite a long time.


Source: Morningstar.

One of the greatest aspects of companies that can avoid industry commoditization is that they often boast huge margins. With few downside pressures other than its own research and development costs, Intuitive Surgical's gross margin has been a model of consistency since 2004.

5. International markets are largely untapped
You can actually make a strong point about emerging markets being a growth source for a multitude of industries, but few offer the growth potential that brand-name pharmaceuticals can bring to the table. Some of the most basic illnesses continue to go untreated in emerging-market countries around the globe and offer a jumping-off point for growth beyond just domestic markets.

One company that's taking the bull by the horns in expansion abroad is Merck (NYSE: MRK  ) . Merck's annual report, filed earlier this month, demonstrates that it now generates 57% of its total revenue abroad. Burgeoning growth markets like India and China are where Merck's investment dollars are currently headed, with opportunities seen in cholesterol and diabetes medications, which are highly contested and largely saturated (no pun intended) in the United States.

Merck's fourth-quarter results continued to highlight this trend, with emerging-market growth up 9% and now accounting for 20% of total sales. Revenue generated from China soared 35%. This is notable as a report by research firm McKinsey & Co. that was noted by Bloomberg estimates that Chinese health care spending may nearly triple from now until 2020 and hit $1 trillion. If you head where the investment dollars are headed, you're likely to succeed.

Are stories of this demise greatly exaggerated?
Recently, some investors have questioned Intuitive Surgical's future. However, Intuitive Surgical expert Karl Thiel believes a visible path to long-term growth persists. Will Intuitive capitalize, or be crushed by unforeseen pitfalls? His report highlights all of the key opportunities and risks facing the company -- and includes a full year of ongoing updates as key new hits -- so be sure to claim your copy by clicking here now.


Read/Post Comments (22) | Recommend This Article (106)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 21, 2013, at 10:22 PM, ortho1g wrote:

    medicaid is not insurance it dose not cover overhead

  • Report this Comment On February 22, 2013, at 6:59 PM, xetn wrote:

    Nothing the government does is efficient or cost-saving. It will always get much more expensive and lower quality of service.

  • Report this Comment On February 22, 2013, at 7:13 PM, FOOLTOCROSS wrote:

    I concur with xetn.

  • Report this Comment On February 22, 2013, at 7:28 PM, mikehughson wrote:

    xetn,

    Your statement is not supported by fact. The US has the lowest government involvement in healthcare of any OECD country and consistently scores at the bottom on any empirical health outcome markers. Free enterprise healthcare in the US is driven mainly by the insurance industry and fear of litigation. Your statement is ideologically biased and not supported by evidenced based medicine.

  • Report this Comment On February 22, 2013, at 8:51 PM, RussellB6 wrote:

    Few if any of the arguments regarding healthcare in this country are not ideologically based. The US may or may not have the lowest government involvement depending on how government involvement is defined. When the Feds do step in their efforts tend to be ham-handed and have generally served to stifle the ability of the healthcare system to operate as a free market while at the same time failing to provide an adequate social safety net to to compensate. Example one: During World War II wages were frozen. When employers could not attract workers by offering higher wages, they offered benefits instead with medical insurance being the primary of those. Some mid-level IRS beaurocrat ruled that those benefits could be deducted by employers as wages but could not be taxed to employees as wages giving workers the illusion that they were getting something for nothing, thus creating the health insurance industry monster we have today. Example two: More recently, insurance companies were prohibited from competing across state lines thereby distorting supply and demand. Absent this government involvement our healthcare system would be a very different animal.

  • Report this Comment On February 22, 2013, at 9:42 PM, griffyote wrote:

    Sean makes quite a convincing scenario for investing in healthcare as fool proof. After doing much research in to the cancer industry I am saddened to think he could be right. There have been many effective cancer treatments that have been suppressed over the last half century that would not have been as profitable for the drug companies. Simply changing ones diet is one. The unknown is, "will the truth get out now that we live in the Information Age?" . I believe the majority of baby boomers will keep believing what their doctors tell them, keep buying the drugs they prescribe for them,and keep eating the diets and exposing themselves to the poisons that are killing them simply because it is too difficult to change their lifestyle. The medical system in the US is anything but a free market.The pessimist in me agrees with Sean that this is a great investment philosophy. The optimist in me wants believe that truth will prevail and that WFM would be a better more ethical investment. But most times when I shop at WFM there are only a few other shoppers in the store because everything is overpriced. Where if I'm in Walmart I notice that the pharmacy line is at least an aisle long. More than one conclusion could be made from this simple observation.

  • Report this Comment On February 23, 2013, at 4:00 AM, riffraff2008 wrote:

    Yes, our new affordable health care will be unavoidably streamlined because there will be a lot less doctors to take on the newcomers. Doctors are leaving the profession not because they expect things to get better. Many people that were promised they could keep their current health care are now finding out their employers are dropping it to pay the lesser penalties for not providing it. But we should not be surprised by the results, the only thing our government is good at is building the most powerful military on the face of the earth. They should stick to that and keep their paws out of the rest of the economy.

  • Report this Comment On February 23, 2013, at 5:45 AM, vicktor wrote:

    A greater part of the huge medical expenses in Europe is funded by the VAT tax and the other enormous expenses are funded by never ending deficits. It goes on and on, will never ever go into a surplus, and it really works pretty good as it is. I'm an American now retired in Italy and I think I can make relatively good comparisons since i once was covered by United Health Care insurance, but have dropped it all. I would submit my medical bills, but the insurance company would refuse some bills and when and if i did get paid, it was only like 65% of my submissions. I didn't cheat, but they sure did to me! Obamacare forces people to buy medical coverage, people who are in dire need of money just to survive, millions of poor, millions unemployed. It punishes (taxes) anyone who does not participate, and now I ask, effectively how can you run a system that literally can not operate unless it partly needs to run in in a deficit as in Europe?. I had to cancel my United Health Care insurance (which included my wife) because the costs per year were choking us. Obama is forcing insurance companies to go into a surplus. If an insurance company does not earn positive, it goes bankrupt. A country can run a medical system in part in a deficit, but you can not run a medical system in surplus to insurance companies when people cannot afford the gestapo methods of payments. I can only say, good bye my America..

  • Report this Comment On February 23, 2013, at 10:13 AM, bshacter wrote:

    government healthcare goes way beyond the discussion above. is there no one on this discussion board that is concerned about the need for healthcare for all citizens wether they have pre-existing conditions or adequate assets to procure it???????

  • Report this Comment On February 23, 2013, at 11:09 AM, DrGray wrote:

    So what's a good ETF to encompass many of these stock suggestions?

  • Report this Comment On February 23, 2013, at 12:22 PM, clsmlee wrote:

    Back to xetn who stated: "nothing the govenment does is efficient or cost saving."

    I am retired Federal employee with funds in the Thrift Saving Plan, which is like a 401k for federal employees. It is run by Federal Employees. I can invest in numerous funds, such as one tracking the S&P 500, small caps, bonds, international stocks, etc.

    Last year the net expense ratio was .027% (or $.27 for $1,000 invested). Can you name me a privately run 401k or mutual fund that is more efficient? (Last year my gains were 18%)

    MLEE

  • Report this Comment On February 23, 2013, at 2:54 PM, 1981gmac wrote:

    mlee, as another ret fed, tsp value was 187K I rolled my tsp into an IRA, have withdrawn 167K, value today is 102K, yes it is all in the market in stocks, no bonds, no mutual funds, You are the only ret fed I have heard of who left their funds in the tsp. NOW why on earth can we not have the working people of this country take their share of Soc Sec. and invest it in the same no brainer index funds we were in while working, it would be THEIR money, able to roll it into an IRA and also bequeath,it upon their death. Whe does the G have to make us dependent on them for OUR ss FUNDS Mean while the people whom we pay their salaries, will be retiring with million dollar tsp's. mitch

  • Report this Comment On February 24, 2013, at 7:13 AM, Tokun wrote:

    To 1981gmac and others who are wondering that the G is making us dependent on them. Read about the depression of the 1930s. The 2007-2009 recession would have been just as bad or worse except for the existence of programs like Social security etc. As Fools, you are the exception who can take care of your finances. The majority have no clue, which is part of the reason for the 2007-2009 recession. Too many people live from hand to mouth, and I'm not talking about poor people. There are a lot of people making 6 figure salaries with very little in savings or investments. For these people, the G is a safety belt or insurance, not only for those that need it, it also reduces liability for those of us who don't. Unfortunately, G has to provide everybody the same opportunity even if you don't need it.

    Just think "why does the government make us get Drivers License or Auto Insurance etc. I suspect you have Life Insurance even the G is not making you. Think how many should but don't.

    Maybe you'll begin to look at G differently. Excuse the preaching, but I just had to because G never gets credit for all the good it does.

  • Report this Comment On February 24, 2013, at 2:22 PM, mainelegal wrote:

    Our Canadian neighbors think it is hilarious that we tout a health care "system" where the providers lose money (medicaid) or worse (charity care) on the care of people in the bottom 40% of the population, while ideologues crow about "the greatest health care system in the world." Which it is if you measure by cost.

    What happened to the land where "there's never a boast or brag ?"

  • Report this Comment On February 24, 2013, at 2:41 PM, Mega wrote:

    It's a bit like buying technology in 1999. Great story, bad numbers.

    http://biz.yahoo.com/p/s_peed.html

  • Report this Comment On February 24, 2013, at 2:51 PM, Mega wrote:

    "health care represents your best investment choice over the coming decade rather than traditionally strong sectors like technology or financials."

    Both trade at much lower valuations, and have lagged healthcare substantially over the last 13 years.

    The idea that the healthcare sector is underappreciated by the market is misguided.

  • Report this Comment On February 24, 2013, at 4:25 PM, crca99 wrote:

    The story of MDT over past 15 years is story of range bound stock price and ever shrinking P/E multiple. Now that multiple is finally low enough, maybe investment growth will materialize. I missed out on return, tho learned tough lesson on gauging value.

  • Report this Comment On February 24, 2013, at 6:46 PM, lowmaple wrote:

    riffraff: Doctor's have high stress jobs. They also make lots of money so they can afford to quit. That may be the reason not Government bungling.

  • Report this Comment On March 01, 2013, at 7:37 PM, NJBiologist wrote:

    @TMFUltraLong--No, on several counts.

    "Drug research all begins in the lab. According to the U.S. National Institutes of Health, there are more than 140,000 clinical studies currently under way. This figure has ballooned since 2000 as higher quality genome-sequencing equipment and better in-lab instrumentation has allowed researchers to conduct significantly more studies for the same previous cost."

    No, the number of trials registered at ClinicalTrials.gov has ballooned as public pressure for prospective registration of trials has grown. This is a response to the tendency for drug companies to bury trials showing no effect.

    "The chart above means a big boost in human genome sequencing demand for Life Technologies..."

    No, clinical trials rarely include whole-genome sequencing. Not that Life Technologies is a bad play, or that sequencing is a bad sector; a very recent NY Times article described the dramatic increase in whole genome sequencing use for diagnosis of rare diseases. --but this has no connection to clinical trials.

    "Considering that health-care research budgets are only expanding, genome sequencing costs are falling, and that the sheer number of clinical studies being undertaken is rising, I can only assume that the next decade will see FDA approvals at a well-above-average rate than in the previous decade."

    No. People said the same thing about target-based drug discovery; if anything, approval rates dropped. The landscape is littered with carcasses of drug companies with great ideas.

    "It's true that generic drugs are a form of drug commoditization in the health-care industry, and their presence does threaten to drive down branded-drug developers' margins."

    OK, this is true. In any given medical specialty, you can expect 50-75% of the prescriptions written to be for generics.

    "However, with the drug development process shortening, as well as the presumption that in-lab research costs will continue to fall, the amount of new drugs that could find their way to market over the next decade could dwarf the number of drugs set to fall off the patent cliff."

    NO. For expenses, read Matthew Herper; for approval times and expenses, read the publications from CSDD at Tufts.

    "The effects against commoditization are even more readily apparent in medical device makers. Intuitive Surgical (NASDAQ: ISRG ) , manufacturer of the da Vinci surgical system, offers the only commercially profitable surgical robotic system."

    Actually, the best thing about the da Vinci is that the annual tab for the maintenance contract is 10% of the purchase price. Good business model, that... sell a device for $1.1M, collect $110k/year thereafter.

  • Report this Comment On March 02, 2013, at 1:56 PM, tusindtak wrote:

    Numbers don't lie. Park the retoric for a moment. Several articles in the Economist magazine and additional research shows that the U.S. health care costs are nearly double that of ALL other 34 OECD countires, http://www.oecd.org/els/healthsystems/oecdhealthdata2012-fre....

    Average cost is 9.8%, U.S. 17.6% of GDP. Doctor visits in U.S. 3.9 vs. average OECD of 6.7 annually. Life expectancy in U.S. 78.7 yrs. vs. OECD avg. of 79.8. All other OECD countries have a national health care system. I vote for cost effective longer life. Let's put the +8% in our economy and allow the U.S. to be more competitive globally. And the wasteful cost spread is growing. The savings in health care and the newly found oil and natural gas extraction techniques presents the next generation a golden opportunity to again be on the upswing with higher incomes and getting our postive, can do, attitude back.

    I say copy the best from the other countries systems and axe our wasteful lower results health care system! My business can't support the waste.

  • Report this Comment On March 07, 2013, at 12:40 AM, Insurin wrote:

    I've been in the Insurance sector for some time now and I do agree with most of this article, I have been watching big pharm and big insurance and I see something major coming once in the near future, stay tuned and watch these industry's: I.T., Insurance, Banking, Health Care and Security/Military.

    Insurin Insurance

    http://www.Insurin.us

  • Report this Comment On March 13, 2013, at 11:54 AM, skypilot2005 wrote:

    In the 90s I lived in the suburbs of Detroit for five years. Canada is located right across the “river”.

    Thousands of Canadians traveled to metro. Detroit for medical care. As I recall, it was mainly because of the long wait times in Canada for their medical care.

    My perception is that “Obama Care” is moving “All In”, too fast.

    Why not start with:

    Tort reform regarding medical malpractice.

    Covering all low income people on Medicaid.

    Etc. and transition to “Obama Care” gradually.

    Many feel the ultimate objective of Obama Care supporters is to have a “Single Payer System”. I think that is a reasonable conclusion.

    Why don’t the supporters of “Obama Care” acknowledge this?

    Hmmmm.

    Sky

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