In this commentary, we examine the high growth prospects of the pharmaceutical industry related to population demographic shifts and how long-term investors may position themselves to benefit. In doing so, we will highlight three companies we believe are poised to benefit from this growth.
Quantifying Growth
Demographics trends within the USA have been indicating the population has been rapidly aging since 1950, as reflected by an increasing proportion of citizens aged 65 and older. Couple this with the trend that people are living longer, marrying later, and having fewer children, the median age of the US is also on the rise.
In 1950, persons aged 65 and older represented 8.1% of the collective population; by 2009, that number increased 58% and is projected to grow another 58% to reach 20.2% (one in five persons) by 2050. Said another way, it is projected that this age group will grow 249% during a 100 year period.
When there is an apparent shift in demographics this profound, opportunities for growth and changes to public policy arise. Being that political implications are not our area of focus, we have instead isolated the pharmaceutical industry as a potential area for growth -- based on the premise that over time, more demand will be created for medications, fueled by an aging population dynamic.
Pharma Phundamentals
Below is a list of 3 pharmaceutical companies, which we believe exhibit strong fundamentals, based on a combination of revenue, Free Cash Flow (FCF), and earnings growth trends:
Abbott Laboratories (ABT)
ABT is currently trading at a forward PE of 12.2 with an annual dividend yield of 3.34%, which we believe makes ABT shares are attractively valued in this environment. Exhibiting extremely low volatility, these shares have remained more stable relative to the collective market, perhaps being a more appropriate choice for more risk adverse equity investors. Revenues have grown 11.6% on a 5 year annualized basis, while earnings per share were up 22% during the same period; FCF figures confirm strength, having risen 18.9% on an annualized basis during the period. Dividends trends indicate growth of 10.2% during the period and analysts are forecasting a 66% in earnings growth for FY 2012.
Teva Pharmaceuticals (TEVA)
Generic drug maker TEVA is currently trading at a forward PE of 8.08 with an annual dividend yield of 2.08%, we believe makes TEVA shares are also attractively valued in this environment. Exhibiting extremely low volatility, these shares have remained more stable relative to the collective market, perhaps being a more appropriate choice for more risk adverse equity investors. Revenues have grown 16.8% on a 5 year annualized basis, while earnings per share were up 36.8% during the same period; FCF figures confirm strength, having risen 32.6% on an annualized basis during the period. Dividends trends indicate growth of 24% during the period and analysts are forecasting an 81.2% increase in earnings growth for FY 2012.
Watson Pharmaceuticals (WPI)
Generic drug maker WPI is currently trading at a forward PE of 11.65 and does not currently pay a dividend, which we believe makes WPI shares are attractively valued in this environment. Exhibiting extremely low volatility, these shares have remained more stable relative to the collective market, perhaps being a more appropriate choice for more risk adverse equity investors. Revenues have grown 18.3% on a 5 year annualized basis, while earnings per share were up 10.2% during the same period; FCF figures confirm strength, having risen 16.6% on an annualized basis during a 3 year period. Analysts are forecasting a 178.6% increase in earnings growth for FY 2012, which may not be comparable.
Final Thought
The shifting demographics of the US population parallel other developed nations throughout the world. Collectively, this may or may not lead to a widespread demographics crisis, where the ratio between retirees and workers shifts dramatically in favor of retirees. During this shift, opportunities are created and specific industries may benefit. We believe the pharmaceutical industry is well positioned to benefit, more specifically the three companies we have highlighted above, given their strength and overall positioning within the industry.
As a higher standard of healthcare also reaches the developing world, there may be even more growth opportunities for the pharmaceutical industry in the years to come, but we'll hold on to that thought for another time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
