If you think that a regime of junk food, minimal exercise and pill popping is unlikely to prolong your life, you would be right. It certainly seems to be taking its toll on the American population. Despite spending $10,000 per capita on healthcare every year – twice what we pay in Europe – the life expectancy of the average American has tailed off in recent years.
But a seismic shift in how America handles healthcare is underway. Health authorities are beginning to appreciate that prevention is better than cure. A swing towards preventative medical care could transform healthcare in the US – and indeed across the world.
This is the message of an excellent research note on the healthcare and life sciences sector by Peel Hunt. And I want to pick over the details of this report today – because I think there are serious opportunities here for penny investors…
America’s health is in crisis
You are well familiar with the problem by now. An ageing population demands more healthcare, but this is increasingly hard to afford. Ironically, it is previous improvements in healthcare that have contributed to the problem. The introduction of vaccines and antibiotics boosted the average global life expectancy by ten years between 1960 and 1984, and since then another five years has been added.
Meanwhile, life expectancy in ‘MENA’ (the Middle East and North African region) and in the ‘BRICs’ (Brazil, Russia, China and India) has increased by 20 years since 1960. With an ever growing proportion of elderly people in the world, the outlook for healthcare providers should be excellent. But as investors in the big pharmaceutical companies know to their cost, this is not always translating into good share price performance.
One cause is associated with life expectancy. Although the US population is ageing, it is not ageing as fast as is in other regions. But more than any other nationality, Americans rely upon pills for the correction of their maladies. The USA’s medical bill is already a serious financial and political problem and all but the most selfish interest groups recognise the need for change. The $10,000 per capita the US spends on healthcare accounts for an extraordinary 16% of GDP. This is twice the level seen across Europe, Japan and Australia and yet life expectancy in the US is lower. Since the early 1980s, the USA’s healthcare spending has doubled, and within that, the proportion spent on drugs has tripled. And yet improvements in life expectancy have been waning.
Why I think penny stocks will lead this new era in medicine
Waiting for diseases to materialise and then zapping them with tablets is not the ideal approach to healthcare. In 2007, a report by the Milken Institute called for a change. It argued that the key to tackling the chronic conditions of heart disease, cancer, respiratory disease and diabetes lies with life-style change – basically diet and exercise – and with screening and disease prevention. This switch away from drugs towards preventative healthcare is adding to the pressure on the big drug makers. Already hit by competition from cut-price generic versions of their best selling drugs, they now face pricing pressure from health authorities increasingly desperate to cut costs. They have responded to this by cutting back on their research, the closure of Pfizer’s facility in Sandwich being a case in point.
Their strategy now is to let small life science innovators do the risky and expensive work of drug discovery, while seeking to push sales into emerging markets. Peel Hunt doubts that this strategy will succeed. True, China is spending billions bringing basic healthcare to its 1.3bn population and is rapidly adopting western remedies alongside its traditional medicines. In August 2009, the Chinese government released a list of 307 essential drugs, with two-thirds of these being western medicines – and by 2020 all State-owned health institutions should carry these drugs, offering a big market for western suppliers. But Peel Hunt warns that the Chinese government retains significant buying power and regulates prices tightly.
Where you might find the stand out winners
For all their prodigious, cash flow and generous dividends, big pharmaceutical companies are finding it tough to grow and that is recognised in low share prices. But on the other side of the coin are the attractive prospects of smaller companies in the field of healthcare screening.
Advances in medical knowledge allied to improvements in the speed and accuracy of analysing medical samples are making diagnostic screening far more effective at just the time when the world is looking to spot disease early.
Peel Hunt highlights medical diagnostics as ‘a stand out beneficiary of reform’ and predicts continued structural growth. For investors on the London Stock Market, it likes Immunodiagnostics (IDH), Synergy Health (SYR) and Axis Shield (ASD).
For my own favourite, a penny share company that could fly over the next few years, and more on the rapidly growing Diagnostics industry, see the June issue of Red Hot Penny Shares.
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
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