According to Milliman Medical Index, healthcare spending is rising at a rate of nearly 8%. In 2010, a typical American family of four spent $18,074 on medical costs, vs. $16,771 in 2009. The upward trend in healthcare costs is not a recent phenomenon. Annual medical costs increased by almost 35% in the last 4 years; from $13382 in 2006 to $18,074 in 2010.
In fact for most of the post-World War II period, healthcare costs rose at a much faster rate than the GDP. Prof. Reinhardt from Princeton University states that, in the last 40 years, while real per capita GDP growth was 1.5%, the growth rate in real per capita healthcare spending averaged 4.1 percent.
The rise in healthcare expenditures can be attributed to many factors. Thanks to advances in technology and healthcare treatments we are living much longer than we used to. Even people with chronic diseases had significant improvements in their life expectancy because of technological developments in medical treatment. As we live longer, we utilize more medical care. Baby boomers will require massive amounts of healthcare in the near future. Obesity and diabetes epidemics are also becoming more widespread. Even temporary diseases such as bird flu (H5N1) can affect much larger populations and become a global epidemic more quickly.
While the increasing healthcare costs are definitely not good for the patients, it benefits those who invest in healthcare stocks. Insider Monkey, screened for the top 8 most profitable healthcare companies based in USA. All the companies in this list have a minimum current operating margin of 20% and EPS growth rate of 10% in the last 5 years.
Alcon Incor (NYSE:ACL): Alcon is a research and development company that produces pharmaceutical, surgical and consumer eye care products. Revenues are increasing at a steady rate of 20% per year. Company has a stable operating margin of 35% which is among the highest in healthcare industry. In last 5 years dividends per share more than doubled from $0.90 in 2006 to $2.21 in 2010. John Burbank's Passport Capital, Tom Steyer's Farallon Capital, Jim Simons' Renaissance, and Dan Loeb's Third Point are among the hedge funds that are extremely bullish about Alcon. On the other hand, Richard Perry's Perry Capital sold all his Alcon holdings during the fourth quarter.
Medtronic, Inc. (NYSE:MDT): Medtronic is a 53 year old medical technology company. The Company manufactures and sells device-based medical therapies. Company operates with an operating margin of 25%. Over the last 5 years, Medtronic’s revenues increased by almost 50%. Quarterly dividends also increased from $0.1 in 2006 to $0.23 in 2010. David Tepper's Appaloosa really likes Medtronic and had more than $50 Million invested in it.
Eli Lilly & Company (NYSE:LLY): Eli Lilly discovers, develops, manufactures and sells pharmaceutical products in 128 countries. Eli Lilly’s operating margin reached almost 32% in 2010. EPS increased from $3.60 in 2007 to $4.76 in 2010. Current P/E ratio of 7.54 is among the lowest in healthcare industry.
Stryker Corporation (NYSE:SYK): Stryker is a medical technology produces orthopedic implants and medical surgical equipments. Companies’ net income increased by 75%; from $1 billion in 2007 to $1.273 billion in 2010. In the same period, operating income also increased from $1.3 billion to $1.75 billion.
Becton, Dickinson and Company (NYSE:BDX): BD is a global medical technology company that operates in three business segments: BD Medical, BD Diagnostics and BD Biosciences. BD’s operating margin has steadily increased to almost 25% in last 5 years. In the same period, the company managed to increase its assets by 30% while reducing asset-to-debt ratio to 20%. Quarterly dividends also increased from $0.22 in 2006 to $0.41 in 2010.This is another favorite stock for hedge funds. David Einhorn's Greenlight Capital and David Tepper's Appaloosa have large BDX positions. On the other hand, Warren Buffett sold his BDX holdings but we don't think he is bearish about the stock.
C.R. Bard, Inc. (NYSE:BCR): Bard designs, manufactures, and sells medical, surgical, diagnostic and patient care devices worldwide. Bard has an aggressive growth policy and acquired global trademarks such as Y-Med, Inc., Brennen Medical, LLC and SenoRx, Inc. In the last 5 years Bard’s revenues increased by 35%, from $1.979 billion to $2.720. Thanks to the stable operating margin of 25%, operating income raised from $394 million to $717 million in same period.
Techne Corporation (NASDAQ:TECH): Techne is a global developer, manufacturer and marketer of biotechnology products and hematology calibrators and controls. Techne has the highest operating (58%) and income margins (41%) in the healthcare industry. In the last 10 years, EPS increased by 5-fold; from $0.8 in 2001 to $2.94 in 2010. Techne also started to distribute quarterly dividends of $0.25 since the last quarter of 2008.
Meridian Bioscience, Inc. (NASDAQ:VIVO): Meridian is a fully-integrated life science company that is engaged in research, development, manufacturing and sales of new drugs and vaccines. The current operating margin of 28.8% is above industry standards. Meridian also has a regular dividend policy. Quarterly dividends increased by more than 6-fold from $0.03 to $0.19 in the last decade.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.