Double-Digit Healthcare Profits in 2015

In a conversation we had last July, I suggested that despite negative accounts in the mainstream media, healthcare spending was set to rise.

At the time, the unpopularity of the Affordable Care Act made it sound like investing in this area would be dead money for the foreseeable future.

Not to boast (well maybe a little), but it turns out that I underestimated the strength of this sector....

The Facts on Healthcare Growth Are Undeniable

Consider that the U.S. Department of Commerce recently upgraded the estimate of U.S. GDP for 2014's third quarter to 5%, the best quarterly growth since 2003.

Here's the thing. Healthcare spending in the period accounted for half a percentage point, or 10% of the entire economy's growth.

With that in mind, I wanted to follow up with you on the topic for two reasons.

First, I wanted you to know an investment we've previously discussed has increased nearly 17% since then. That's more than four times the S&P 500's 3.7% return over the same period.

Second, I want to discuss three factors I see driving this sector forward for 2015. Specifically, I see three major trends that bode well for our healthcare investment this year. Let's take a look.

Rising Healthcare Trend No. 1: A Surging Economy

Analysts note that healthcare spending is a "lagging indicator." In other words, medical spending tends to follow improvements in the economy.

That means we're looking at a strong 2015 as we continue to see an increase in jobs and robust sales of big-ticket items like cars and homes.

Labor Department data shows that 2014 was the best year for new jobs since 1999. Unemployment last month fell to a post-recession low of 5.6% as jobs rose by about 252,000.

Last year, auto sales posted the strongest numbers since 2006, with light car and truck sales up 5.9% from a year prior. For the full year, sales came in at more than 16.5 million units.

Meantime, the housing industry continues to expand. In December, housing starts increased 4.4% from a year ago. For the full year, they were up 8.8%.

Rising Healthcare Trend No. 2: Specialty Drugs

Another factor investors should take into account is the growing importance of high-margin specialty drugs.

PriceWaterhouseCoopers says spending on these compounds will quadruple by 2020. The firm sees spending going from $87.1 billion in the base year of 2012 to $401.7 billion in 2020.

As a result, the burgeoning area of hepatitis C medication is poised to play a major role in the healthcare industry. Spending in the area is expected to rise at least 200% in both 2015 and 2016.

Nameplates like Gilead Sciences Inc. (Nasdaq: GILD) and AbbVie Inc. (NYSE: ABBV) have both come out with new treatments for the blood borne condition. Each of these drugs has a list price of more than $80,000 for a 12-week regimen.

Gilead has the new drug Harvoni as a follow up to its blockbuster Sovaldi.  AbbVie offers a combo hepatitis C regimen that has gained regulatory approval in both the United States and Europe just in the last month.

Rising Healthcare Trend No. 3: Mergers & Acquisitions

In 2014, the biotech and drug sectors saw the rise of mergers fueled by tax inversions. These are deals in which the acquiring company buys a firm based offshore where corporate income taxes are lower than in the United States.

Thomson Reuters says the healthcare sector last year accounted for the second largest category of M&As. In fact, U.S. M&As were valued at $1.52 trillion in 2014, which was 45% of global deals for the year.

No doubt, Washington has cracked down on tax-inversion deals. But I still expect to see plenty of merger activity in the life sciences this year as big firms seek to increase their pipeline of drugs while lowering their expenses.

In fact, 2015 already has seen two big healthcare deals announced.

In a $5.2 billion deal, Shire Plc. (Nasdaq ADR: SHPG) is now set to acquire NPS Pharmaceuticals Inc., a maker of treatments for rare diseases.

And global giant Actavis Plc. (NYSE: ACT) is slated to take over botox firm Allergan Inc. (NYSE: AGN) in a $66 billion deal set to close later this year.

How to Play the Rally

All of which gets us back to the ETF that we discussed back on July 17 of last year.

See, First Trust Health Care AlphaDEX (NYSE: FXH) is a broad play on the healthcare sector that gives us exposure to pharmaceuticals, life sciences, medical equipment, and healthcare providers.

The fund holds stocks like Illumina, Inc. (Nasdaq: ILMN), which specializes in genetics and personalized medicine. Then there's UnitedHealth Group Inc. (NYSE: UNH), a diversified managed healthcare company that serves more than 85 million people globally.

And FXH also holds Quest Diagnostics Inc. (NYSE: DGX), a clinical laboratory services provider and Fortune 500 company.

But that's just the beginning. Other stocks in the FXH portfolio include:

  • Actavis Plc. (mentioned above) is a top pharmaceutical company with a strong global presence. It takes a dual approach to its portfolio of products, offering both branded and generic medications. The Irish company has currently launched more than 1,000 products, including 20 injectable generics that recently hit the market in the United States.
  • DaVita HealthCare Partners Inc. (NYSE: DVA) is one of the largest companies in the country focused on kidney care. It provides dialysis and administrative services for a network of 1,809 outpatient facilities in 43 states. In all, the company serves around 142,000 patients and provides acute in-patient dialysis services to roughly 900 hospitals.
  • Express Scripts Holding Company (NYSE: ESRX) is the largest pharmacy benefit management firm in the United States. It also ranks as a Fortune 100 company and is devoted to managing prescription benefits for tens of millions of Americans. It works with thousands of health plans and other clients in the industry. Employers, unions, and government organizations rely most heavily on its services.

Through a total of 76 holdings FXH covers the entire waterfront of health-related investments set to surge this year. And it does so at a fraction of the price of some of its portfolio stocks.

The fund trades at about $62.00. Over the last two years, FXH has increased by more than 75%. That's more than double the S&P's gains of 35% over the period.

And I believe all the factors are in place for this ETF to continue outperforming the market.

As millions of Americans spend more money on healthcare across the board, FXH is the kind of investment you can count on for the long haul.

About the Author

Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...

  • He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
  • He was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
  • As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.

This all means the entire world is constantly seeking Michael's insight.

In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.

Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.

And even with decades of experience, Michael believes there has never been a moment in time quite like this.

Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.

To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.

His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.

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