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.
How to Play the Rally
About the Author
Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.