By Greg Jensen
The kerfuffle in the pharmaceuticals market on Monday, following Eli Lilly’s (LLY) announcement regarding their Alzheimer’s drug, shows the importance of finding an effective treatment for the disease. According to The Alzheimer’s Association’s report, 13% of Americans over the age of 65 suffer from dementia, rising to a staggering 45% of those over 85. Most people are aware that the U.S. population is aging, but just how rapidly is less well known. From 2000 to 2010, the number of U.S. residents over the age of 65 increased by 15.3%. It is little wonder that the overall number of dementia sufferers is increasing rapidly, and an effective drug to treat the disease is the holy grail of pharmaceutical companies.
From an investor’s perspective, trying to pick the winner is at best difficult. The more interesting question is, are there investments that, over the long-term, are likely to benefit from an aging population in general? Whether we beat individual diseases or not, it is a fair assumption that general medical advances will lead to an increasing number of people living longer in the coming years? While longevity sure beats the alternative, it does bring with it a unique set of problems and needs. For long-term investors, core holdings in companies placed to meet those needs may well prove wise.
The first place to look is in the nursing home sector. The growth of households with two working adults makes it difficult, if not impossible, for the middle aged to care for aging parents. Residential care is often the only answer. (A word of warning about this area, though. An aging population is going to put enormous pressure on Medicare and Medicaid, making some form of structural reform inevitable in the coming years. As around 80% of nursing home revenue currently comes from those sources, any changes should be watched carefully)
It is interesting that many of the top providers of nursing home care are privately owned, often by private equity companies. One of the larger companies that is publicly quoted is Kindred Healthcare (KND), and their mix of nursing homes and specialist hospitals may play out well as the U.S. population ages. For a more diversified play on long-term care facilities, Health Care REIT (HCN) offers a juicy yield of around 5% and significant opportunities for growth as demographics change.
McKesson (MCK) is on the other side of the business, as a supplier of pharmaceutical, support and information management products to nursing homes and hospitals. MCK is up around 22% over the last year and may be considered fairly valued at the moment, but remember, this is a long-term strategy, not a trade.
Omnicare (OCR) is another to consider. They are an institutional pharmacy, supplying drugs to care facilities. The company’s aggressive buying of smaller players in the field has been controversial, but has made them a huge player in the sector.
A less obvious play to many would be in the supply of paper products. If rising costs dictate that more elderly people care for themselves or are looked after by family members, leading brands such as Kimberley Clark’s (KMB) Depends will see significant growth.
The above suggestions are just that, suggestions, but I believe it is important for long term investors to consider the evolving shift in demographic patterns as they evaluate their portfolios. The chances are that most of us will live to a ripe old age, so we may as well invest in a way that takes that welcome development into account. Live long and prosper!