Health Care Sector Spurred by Population Growth and Mergers and Aquisitions

By: Frank Holmes | Mon, Jun 30, 2014
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Recently I spoke with John Derrick, director of research here at U.S. Global, to pick his brain about what he thought was the most interesting sector right now. You might expect him to have said energy, perhaps because of the intensifying violence in Kurdistan Iraq, a major oil producer. But instead, he said that he had his eyes on health care.

This might raise some eyebrows since health care has slightly underperformed in the last three months compared to some of the other sectors such as energy and utilities. But health care does appear to be due for a major rotation, fueled by a number of reasons: dramatically changing global demographics, the recent rise in biotech and pharmaceutical mergers and acquisitions (M&As) and companies' relocations to more tax-friendly countries.

As you can see in the bar graph below, health care, while still reliable, has much room to grow.

S&P 500 Sector Returns from MArch 31, 2014 - June 26, 2014


A rapidly growing and aging world population

By 2030, a mere decade and a half from now, the world population is expected to grow 16 percent to 8.3 billion. And because we're living longer, a greater number of people will fall into the 60-and-above age bracket, when chronic diseases such as stroke, cancer, diabetes and heart disease become more pronounced. Life expectancy is expected to rise to 73.7 by 2017. Two billion of us--that's the equivalent of more than six times the U.S.'s population--will be over the age of 60 by 2050, a whopping 233 percent increase from 2000.

Graph: World Population over the age of 60

New advancements in 3D printing are increasingly improving and saving lives

Meeting the demands of such a staggering number of people, many of them at advanced ages, will require unprecedented innovation in key areas such as energy, food production, housing and especially health care. We're already seeing practical applications of advanced biotechnology that blur the line separating sci-fi and reality--3D printing, bionic eyes and limbs, face transplants--but better and more efficient treatments are needed to confront the unique challenges that accompany an overcrowded planet.

Average global spending on health care as a percentage of gross domestic product (GDP) is currently above 10 percent. The U.S. alone spends over $8,000 annually per person on health care, more than any other country. Even so, these figures are expected to rise over the coming months and years as our population matures and, unfortunately, we become more accustomed to unhealthy diets and sedentary lifestyles.

In emerging countries, health care infrastructure is in desperate need of improvement. Many parts of the fastest growing regions, such as the Middle East and Africa, sorely lack caregivers, surgeons, hospital beds and easy access to health care in general. These are areas where global health care providers, drugmakers and biotech firms can realize huge growth potential by entering historically underserved markets.


M&As and relocations

As we've seen in other industries lately, heath care companies are undertaking a series of high-profile M&As that enable them to increase their innovative bandwidth and expand their global reach.

Following are a couple that John says are worth checking out.

bigen idec logo

Biogen Idec, the top holding in both our Holmes Macro Trends Fund (MEGAX) and All American Equity Fund (GBTFX), was founded in 1978 in Geneva, Switzerland, and specializes in developing leading treatments for neurological and autoimmune disorders such as multiple sclerosis (MS). Since its 2003 merger with IDEC, it has gone on to acquire two other companies.

Now headquartered in Weston, Massachusetts, Biogen Idec controls business and research operations facilities all over the world and generates close to $7 billion in annual revenues.

Although sales of its popular Avonex have slowed lately, Biogen Idec still has strong growth potential. Its oral MS drug Tecfidera, launched in April of last year, has become a certifiable blockbuster hit, generating $1.38 billion in the first quarter of this year alone.

As you can see below, Biogen Idec has been rising steadily over the last three years, consistently outperforming the S&P 500.

Past Performance of Biogen Idec since June 2010

Grifols

Another company that has benefited from acquisitions is Grifols, a leading producer of blood-plasma products. It's made several of them in the past decade and continues to seek additional opportunities, especially within diagnostic and hospital services.

Because of these actions, Grifols is now the world's third-largest manufacturer of plasma protein therapies, with donor and treatment centers dotted across the globe, from Argentina to Canada, Germany to China, Thailand to Australia. Although headquartered in Spain, it conducts more than 90 percent of its sales outside of its native country.

Grifols is in the early stages of building a new logistics facility in Ireland, to be completed by February 2015, to take advantage of the country's inviting 12.5 percent corporate tax rate.

Other companies seem to have the same idea. Minneapolis-based Medtronic, manufacturer of medical devices such as pacemakers, is planning a corporate inversion by merging with Dublin-based Covidien, producer of pharmaceuticals and surgical supplies, and moving operations to Ireland. Giant New York City-based drugmaker Pfizer, whose attempts to purchase London-based AstraZeneca fell through in May, is also speculating on whether to become a foreign company, according to Investor's Business Daily.


Reaching the masses.

The recent trend in health care M&As has many benefits, not least of which is the ability to reach a wider range of people who depend on the drugs and treatments the industry delivers. Biogen Idec and Grifols, among others, exemplify the idea that biotech firms and drugmakers can join forces and broaden their global reach in an ever-increasing population--while also serving the needs of their shareholders.

These are the opportunities that John and the other portfolio managers here at U.S. Global seek out to ensure that our investors' money is working optimally.

 


 

Frank Holmes

Author: Frank Holmes

Frank E. Holmes
Chief Executive Officer
Chief Investment Officer
U.S. Global Investors

Frank Holmes

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron's, The Financial Times and other publications.


Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

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