With the debate over the benefits and detriments of the Affordable Care Act still very much in the headlines, health care providers — enterprises ranging from device manufacturers to hospitals, nursing homes and billing and payment system companies — have labored under an unusually heavy cloud of uncertainty.
How will our health care industry evolve and who will be the winners and losers?
For investors, it would be easy to pull away from this sector entirely — and not only in the obvious places, such as the device industry, where reimbursement is still an issue, but also in segments where stock prices have soared, such as biotech and health care distributors. Within the S&P 500 alone, biotech stocks were up more than 38 percent in 2012 and a stunning 75.2 percent in 2013, and we're not inclined to chase those returns.
This presents both a challenge and an opportunity for money managers. How should a thoughtful investor approach the health care sector?
In a word — globally. The most successful health care companies — Medtronic, Covidien, Mallincrodt, UnitedHealth Group — are global enterprises, providing products and services internationally. This in and of itself helps mitigate any drag on these companies' U.S. operations.
More so, the global population is undergoing a massive shift. In his influential 2000 book, "Gray Dawn: How the Coming Age Wave Will Transform America — and the World," Peter Peterson called global aging "an iceberg dead ahead." He cited three major trends reshaping the industry:
• Medical advances, along with increased affluence and improvement in public health, nutrition and safety, are raising average life expectancy dramatically.
• A huge baby boom generation in the U.S. and several other countries is now making its way toward old age.
• Fertility rates have fallen. Japan and a number of European countries are now running far beneath the "replacement rate" necessary to replace today's population.
Baby boomers are not going gently into old age. They are demanding new medical services that previous generations never had, such as bariatric surgery to address the obesity epidemic in the U.S. and elsewhere, and orthopedic services for aging athletes.
An aging population also will require a greater concentration in eldercare and end-of-life services.
Our bets on the health care future stand to benefit from many of these trends.
Covidien (NYSE: COV): An "aging population play," this Dublin, Ireland-based company has strong Minnesota ties. In 2010, Covidien completed a $2.6 billion acquisition of EV3 of Plymouth, a maker of medical devices for the endovascular treatment of peripheral vascular and neurovascular diseases. Mallinckrodt, then a Covidien division, in 2012 bought CNS Therapeutics of St. Paul. Beyond these companies, Covidien sells laparoscopic instruments, operating room instruments, electrosurgical and ablation products, sutures and hernia mechanical products. The company's medical supply division offers a full line of nursing care products for conditions that include incontinence, wound care and tube-based feeding.
Medtronic (NYSE: MDT): In the past several years, Medtronic has stepped up its game globally. In 2010, the company acquired Invatec, a European developer of technologies for the interventional treatment of cardiovascular disease, and in 2012 it completed acquisition of Kanghui Holdings (NYSE: KH), a provider of orthopedic devices in China.
Mallinckrodt (NYSE: MNK), spun off from Covidien last July, is also headquartered in Ireland. It sells specialty branded and generic pharmaceuticals and imaging agents in 70 countries. Its key therapeutic areas are pain, central nervous system and addiction treatment.
UnitedHealth Group (NYSE: UNH): With 165,000-plus employees, UnitedHealth Group serves more than 85 million individuals in all 50 states and more than 125 countries. It is a central player in the implementation of the Affordable Care Act. Its technology services unit, Optum, is responsible for the overhaul of both Minnesota's MNsure system and the federal government's Healthcare.gov site. In 2012, the company announced a $4.9 billion transaction to buy Amil Participações SA, Brazil's largest health benefits and services provider.
Health care is our present and our future. The sector is inextricably tied to the human condition, and the conditions in this industry are favorable for investors.