Building wealth from healthcare — Chong Wei Sing
MAY 26 — While recent news headlines have been dominated by natural disasters and sovereign debt crises, a greater concern looms over our heads.
Globally, from the most developed countries such as the United States to emerging powerhouses such as China, governing bodies are facing a common yet increasingly urgent problem: A burgeoning healthcare burden on society.
As the world population grows towards nine billion by 2050, both global healthcare demand and the corresponding spending are estimated to expand faster than global income. These twin engines of growth for the healthcare industry, marked by the wave of ageing baby boomers and demographic shifts, may yet offer willing investors a great opportunity that is just starting to unfold.
Despite continuous technological advancements, numerous hard-to-treat medical conditions are still beyond our current medical knowledge and understanding.
As people age and lifestyles change due to increasing affluence, diseases such as diabetes and other cardiovascular and neurological problems are expected to become increasingly prevalent. In addition, the industry will need to meet other currently unknown medical conditions.
Considerable growth can thus be expected of the healthcare sector. The search for cures and treatment requires tremendous investments of resources and time, but it also potentially offers rewards that far outweigh its costs. Healthcare companies that make viable medical breakthroughs can expect huge returns, sustainable for long periods due to patent protection and high barriers to entry.
The US Centers for Medicare & Medicaid Services, the healthcare regulatory watchdog, noted that the country’s national healthcare expenditure had expanded to 17.6 per cent of gross domestic product in 2009 and estimates it will grow at a compound annual growth rate (CAGR) of 5.9 per cent in the current decade till 2020. This outstrips the country’s estimated economic growth rate of 4.8 per cent CAGR over the same period.
Other than the wave of ageing baby boomers consuming more healthcare in aggregate, the explosive growth in national healthcare expenditure can also be attributed to the continuous introduction of expensive medical drugs and equipment. Interestingly, the US scenario is not an isolated case.
Similar observations can be seen in the healthcare systems in the United Kingdom, Germany, Japan and China. Despite having more regulatory controls, these countries also feel the increasing strain of healthcare weighing on their societies and economies, given the sheer magnitudes of the growing demand.
Looking within Singapore, the recently proposed Budget has also highlighted the importance and urgency needed to deal with our own domestic healthcare needs. This demonstrates that the issue of rising healthcare costs and spending is indeed very real and global.
The healthcare industry is a vastly diverse universe on its own.
From innovative drug-discovering segments such as biotechnology and pharmaceuticals, to medical equipment makers, distributors and hospitals, every segment has its own unique opportunities to offer.
A shrewd investor could certainly find segments within the industry that would suit his investment needs at any given point in time.
Strong investment performances can be delivered by the healthcare sector as well.
According to data compiled by broker house Cowen, within the period from 2007 to 2010, the S&P 500 Index recorded its highest yearly performance of 23.5 per cent in 2009.
In the same year, more than half the segments within the healthcare industry actually outperformed the S&P significantly, showing returns between 30 per cent and 70 per cent.
An investor can also benefit from the defensiveness of the entire healthcare sector against volatile market movements over an extended period.
According to Thomson Reuters data, an individual who invested in the broad market represented by the MSCI All-Country World Index beginning in 2007 would still be in the red by the end of this year, losing 15 per cent or more of the invested principal.
This pales in comparison to those who had invested in the healthcare sector, represented by the MSCI All-Country World Healthcare Index, as the latter would have recouped any lost principal over the same market downturn and would have done so with less volatility experienced in the portfolio.
In addition, as most large market capitalisation healthcare companies such as Johnson & Johnson and Pfizer are highly cash-flow generative, one can also look forward to the high dividend payouts as a form of income return, which may not be easily available for investments in similar-sized companies from other industries.
In the coming years, much emphasis will be placed upon pharmaceutical and biotechnology companies that could potentially emerge stronger with refreshed drug pipelines and portfolios post the fabled “patent cliff”.
Many such companies continue to generate large amounts of cash that could be used to expand their businesses and increase shareholder returns.
As governments continue with austerity measures and healthcare reforms, excellent investment opportunities can be found in healthcare companies with the benefits of scale and expertise in delivering affordable and quality products and services to meet the needs of the general public.
Over the longer term, the industry faces an even better outlook, with the strong drivers of growth in ageing demographics and increased healthcare spending derived from increased affluence. Longer human life expectancies also further extend the longevity of chronic needs for healthcare products.
The healthcare industry, thus, certainly is not “boring”. It may yet give the world the next phase of stable growth in an uncertain world. — Today
* Chong Wei Sing is part of the global equities team at UOB Asset Management.
* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.