by Hilary Kramer | January 24, 2011 3:00 pm
As “baby boomers” reach senior citizen status, the population of America will just keep getting older. In fact, this is a milestone year — the first of the nation’s 78 million baby boomers turn 65 this year. And it could be a banner year for health care stocks.
Baby boomer is the name given to the generation born in a “baby boom” following World War II, between 1946 and 1964. Baby boomers represent 26% of the population.
According to the US Administration on Aging, there are already 40 million senior citizens, and that number is expected to double in 2030. This represents a 3.5% gain in the number of seniors per year over the next 20 years. Furthermore, numerous studies have estimated that people older than 75 years of age incur per capita health expenditures up between four and six times higher than those of people from the 25 to 34 year old age group. Therefore, it is reasonable to assume that health care expenditures will increase in the future, and it should benefit companies that provide health care products and services, and health care stocks.
Investors need to keep some cautionary notes in mind. The demographics represent a long-term favorable trend that will be beneficial to the industry, but it will not usher in an era of rapid growth. Furthermore, future levels of government reimbursement will continue to be an issue limiting growth. Stock selection is critical as well, this is one rising tide that will not lift all boats.
My favorite health care stocks at the present time include:
Teva Phamaceutical Industries (NASDAQ: TEVA[1]) is one of my top picks in the big-cap pharmaceutical space. Teva has a balanced business model as it has a leading position in generic drugs, and also has game changing proprietary products, including Copaxone for multiple sclerosis and Azilect for Parkinson’s disease, both illnesses that are more prevalent in late adulthood and in the aging population.
The company also has a strong presence in rapidly growing global markets. It has scale and leverage over competitors — it manufactures many of the very chemicals and active ingredients that go into their drugs. Teva also has the legal counsel that is able to endure the long and expensive process of generic drug approval.
The health care stock has been stuck in a relatively narrow range in recent months, but there is attractive upside to our target price of $68 a share.
Dendreon (NASDAQ: DNDN[2]) is a biotechnology company that develops cancer treatments. The company’s most promising product is a prostate cancer (a common cancer among aging men) treatment called Provenge. Many industry insiders have indicated to me that the drug represents a genuine breakthrough in saving lives and can be used effectively to combat numerous other cancers.
Due to the expanding baby boomer population, there will be more than 18 million cancer survivors by 2020 — 4.3 million more than in 2010. The associated costs of cancer care will be $158 billion — $33.2 billion more than in 2010, according to a new study published Jan. 12 in the Journal of the National Cancer Institute.
The major overhang with the stock is Medicare reimbursement issues. Dendreon is quite expensive at more than $30,000 per dose. However, I am confident that reimbursement will eventually be approved, given the effectiveness of the drug. The company is adding capacity in order to meet the expected demand for Provenge, which should enable to achieve revenues of $350 million to $400 million in 2011. Given the positives of the proven efficacy of the therapy and the FDA approval here in the United States combined with the overhang of the cost of ramping up and receiving reimbursement approval, I expect that Dendreon will be ready to sell themselves to a large pharma company in 2011. We are buyers of this health care stock under $42.50, with a price target of $50.
RadNet (NASDAQ: RDNT[3]) is the largest provider of free-standing fixed-site outpatient diagnostic services in the United States. The company has over 180 diagnostic centers, with a little over half of them in California. While the company has struggled to be profitable, we believe the cost efficiency offered by imaging services over invasive procedures to diagnose illnesses will allow the company to succeed in the long term.
The company’s late December acquisition of “Imaging on Call” has given them a foothold in the billion-dollar remote imaging interpretation business. Plus, RadNet has been picking up small imaging centers across the country at bargain prices. Many of these small operators just can’t make it because they don’t have the muscle to negotiate with insurance companies on reimbursement. On the other side of the equation, these smaller players don’t have the relationship with suppliers — like General Electric (NYSE: GE[4]) — that Radnet does, thus lowering the cost of multi-million-dollar equipment. RadNet is starting to generate interest from investors, just recently being added to the Deutsche Bank’s focus list of their top stock picks. This is quite a feat for such a small-cap health care stock. I am maintaining a $5 target price.
Trans1 Inc. (NASDAQ: TSON[5]) is a medical device company whose proprietary technologies treat degenerative conditions of the spine related to the lower lumbar region. TSON’s stock surged approximately 70% since Jan. 7 after the company announced that health insurer Humana changed its policy and would reimburse patients receiving the company’s AxiaLIF procedure. TSON believes that Humana (NYSE: HUM[6]) is the first health insurer to reimburse for AxiaLIF, and the market is getting optimistic that others will soon follow. Of additional significance is the fact that Humana operates primarily in the South, which is also Trans1’s strongest marketing region.
AxiaLIF is a promising technology, as it is a minimally invasive way to treat lower lumbar condition, and is much more cost effective than traditional lumbar surgery, as patients stay in the hospital less and return to work more quickly. Given this potential for a more cost effective outcome, I remain confident that additional insurance companies will follow Humana’s lead and offer reimbursement for the procedure. Currently, I have a $5 price target and recommend purchasing shares of the health care stock at less than $3.25.
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