The global change in demographics is creating challenges for the world’s economies, and companies are realising the importance of providing suitable healthcare for an older population as life expectancy increases.
According to the World Health Organisation, between 2000 and 2050, the world’s population of over-60s will double from roughly 11 per cent to 22 per cent. The absolute number of people aged 60 years and over is expected to increase from 605m to 2bn in the same period.
The increasing wealth and life expectancy means people will demand more from healthcare providers.
Government regulations and concerns about exploding costs have always impacted the healthcare industry. However, the industry also represents a sector of the economy with defensive portfolio characteristics – and includes many types of companies that can grow their businesses in a range of economic environments.
New drugs on the rise
With a great deal of research, drug discovery and new medical device technologies, it is clear that there are attractive investment opportunities in this versatile industry.
The US Food and Drug Administration has reported a gradual rise in the number of new drugs accepted each year, and the US regulator approved 35 new drugs in 2012 – the most in 16 years.
This suggests that pharmaceutical makers are poised for growth following product failures and after losing billions of dollars in recent years to generic drug makers because of patent expirations.
Furthermore, the recognition of a need for greater access to healthcare in emerging markets as the wealth of people there increases also represents an important opportunity. Most notably, China, Brazil, and India offer additional, large healthcare markets, as governments have more aggressively supported and invested in their local healthcare systems.
China is one of the most rapidly ageing countries in Asia. According to the 2010 census, almost 50 per cent of the Chinese population lives in urban areas. An ageing society in which more people suffer from chronic disease means that a reduced workforce has to pay for soaring costs.
Austerity leads to cuts
During periods of economic austerity, many countries saw healthcare budgets severely cut. In April 2012, Spain announced a €7bn (£6bn) cut to its healthcare budget, requiring many Spaniards to pay more for prescriptions, with the country making stricter checks on foreigners who come to Spain to take advantage of free healthcare.
Furthermore, back in 2009, president Obama went to Congress to talk about the need to overhaul healthcare. The ever-increasing costs and the growing profits of healthcare corporations have resulted in the US system spiralling out of control.
President Obama dwelt most on addressing the rising cost of healthcare, which was not only affecting families but the nation as a whole. “When healthcare costs grow at the rate they have, it puts greater pressure on programs like Medicare and Medicaid. If we do nothing to slow these skyrocketing costs, we will eventually be spending more on Medicare and Medicaid than every other government programme combined,” he said.
With these concerns at the forefront, the Obama administration worked on a plan and introduced ‘ObamaCare’, also known as the ‘Health Care for America Plan’ in 2010. ObamaCare also makes health insurance more affordable to lower and middle-income Americans and small business employers.
With roughly 44m Americans unable to get health insurance, there are still concerns about whether ObamaCare is enough to reform the $2.8trn (£1.8trn) US healthcare industry.
Long-term investment pays
Long-term investment in companies that are addressing real challenges is key and show exciting times ahead for the sector.
This is recognised particularly in DaVita Healthcare Partners, which provides dialysis to patients suffering from end-stage renal disease (ESRD). The company has benefited from structural growth due to the increasing incidence of diabetes and lower deaths as treatment has improved.
Options for these patients are limited, given that the only alternative to long-term treatment is a kidney transplant. The recent acquisition of Healthcare Partners, the doctor-network operator, by DaVita in 2012 has given the company a strong physician practice platform to benefit from Medicare reimbursement changes and to offer solutions to cost efficiencies.
Healthcare Partners’ acquisition diversifies the business into managed healthcare and could give further upside. Companies like DaVita offer the opportunity to succeed in a tough environment.
Jamie Jenkins is director of global thematic equities at F&C Asset Management
