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. As can be seen from the graph below, annual medical costs increased by almost 35% in last 5 years; from $13382 in 2006 to $18,074 in 2010. In fact for most of the post-World War II period, health care 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 health care 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 global epidemics more quickly.
While the increasing healthcare costs are definitely not good for the patients, it benefits those who invest in healthcare stocks. We 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.
Amgen Inc. (NASDAQ:AMGN): Amgen Inc. is an international biotechnology company headquartered in Thousand Oaks, California. Amgen’s operating margin reached almost 34% in 2011. Current P/E ratio of AMGN is 11.2. Billionaire investor Jim Simons had $140 in AMGN at the end of June.
Stryker Corporation (NYSE:SYK): Stryker is a medical technology company that produces orthopedic implants and medical surgical equipments. The company’s net income increased by 75%; from $1 billion in 2007 to $1.25 billion in 2011. Its current P/E ratio is 14.36.
Eli Lilly & Company (NYSE:LLY): Eli Lilly discovers, develops, manufactures and sells pharmaceutical products in 128 countries. Eli Lilly’s operating margin reached almost 25% in 2011. EPS increased from $3.60 in 2007 to $4.25 in 2011. Current P/E ratio of 8.53 is among the lowest in healthcare industry. Jim Simons is also bullish about LLY. He had nearly $400 million in the stock at the end of second quarter.
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 23% in the last 5 years.
Atrion Corporation (NASDAQ:ATRI): Atrion manufacturers medical devices, surgical products & specialty medical components. Its operating margin reached almost 32% in 2011. It has a P/E ratio of 16.51. Chuck Royce had a $45 million position in the stock.
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 (56.23%) and profit margins (38.73%) in the healthcare industry. In last 10 years, EPS increased by 3-fold, from $0.8 in 2001 to $3.02 in 2011. Techne also started to distribute quarterly dividends of $0.25 since last quarter of 2008.
St. Jude Medical (NYSE:STJ): St. Jude Medical develops medical technology and services that focus on putting more control into the hands of those who treat cardiac, neurological and chronic pain patients worldwide. Its operating margin reached 22% in 2011. Current P/E ratio of STJ is 12.67.
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. Current operating margin of 25.12% 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 last decade. Steve Cohen had a small position in VIVO at the end of June (see billionaire Steve Cohen’s top picks).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.