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Summary Is this a good time to invest in Health Care Sector? What are some trends in the health care sector? How can investors capitalize on the health care trends to make good investment decisions? All investors have considered investing in specific sectors to bolster the return on investment portfolio. This approach while increasing the risk of the overall portfolio also has the potential to magnify returns if the sector performs well. Health care, considered as a defensive sector will likely outperform many other sectors due to a variety of reasons- aging baby boomers who are likely to need more care, increasing life expectancy, ever pervasive need to develop drugs to treat diseases, cutting edge innovations in medicines and state of the art medical equipments. According to an article in Forbes, health care spending per capita in US is around $10,000 this year with a total of $3.2 trillion in national health care expenditure. Here is my favorite pick in the health care industry: Vanguard Health Care Sector Fund (MUTF: VGHCX ): (click to enlarge) Source Data: Vanguard.com Key performance measures NAV Assets Expense ratio PE ratio $225.21 $48 B .34 37 VGHCX is well diversified fund in the health care sector with a good mix of investments in pharmaceuticals, bio technology, medical equipment companies, managed health care and health care facilities. The largest investment is in pharmaceutical firms which constitute about 45% of the portfolio. The fund focuses on well established large cap companies with average market capitalization around 45 B. Some of its top holdings include Bristol Myers Squibb (NYSE: BMY ), Allergan (NYSE: AGN ), Ely Lily (NYSE: LLY ), United Health Group (NYSE: UNH ), Merck &Co (NYSE: MRK ). About 80% of its portfolio is allocated to companies in US and the remaining 20% is invested in other countries. The foreign holding includes well established companies such as Roche Holdings and Novartis (NYSE: NVS ) based in Switzerland, Sanofi (NYSE: SNY ) located in France and Astra Zenaca (NYSE: AZN ) in United Kingdom. The expense ratio of .34 is very low compared to other healthcare funds. The fund is actively managed with a low turnover ratio of 20%. The turnover ratio indicates the number of times the fund manager buys/sells the securities within the fund. The low turnover ratio will result in lower transaction costs and higher returns to fund holders in the long run. It also reflects the expertise of the fund manager in picking companies with great growth potential and holding for longer periods as opposed to trading frequently. The average annual return on the fund has been around 17.28% since the fund’s inception in 1984 and well above the industry average. According to Vanguard interactive chart, an investment of $10,000 in 2005 would now be worth around $35000 in 2015. This return includes the impact of US and worldwide recession during 2007 to 2009. The total distributions including dividends, Short term, and Long term capital gain was $19 in 2014 which amounted to approximately 8% of NAV. According to Vanguard website, the realized gain as of September 2015 was 4.32% of NAV and the unrealized price appreciation of the fund was a whopping 38%. The median market cap of the assets within the fund is 42.8 billion with a total of 83 holdings. The PE ratio of 37 seems high compared to the industry average (as measured by the MSCI ACWI Health care index) of 24.4 as of October 2015. The health care sector has been characterized by blockbuster mergers/acquisitions, collaborative deals among big pharmaceuticals to develop the next breakthrough treatments for diseases. According to the Pharmaceuticals and Life Sciences insights by PWC.com, there were a total of 59 deals with a value of 67.6 billion during 2015. The low interest rate environment has fuelled a surge in mergers/acquisitions as well as organic growth within the health care sector in US and around the world. The rising share prices have facilitated mergers by enabling companies to use stock as a currency for acquisitions. The VGHCX fund has significant stakes in many of the pharmaceutical/biotech firms companies involved in mutually beneficial deals/consolidations. These deals are expected to shore up the future cash flows considerably for the portfolio companies within the fund and boost the return to holders of VGHCX fund. Highlights of Mergers/Acquisitions/ Partnership deals on top holdings companies within the VGHCX Fund: Actavis, a Dublin based pharmaceutical acquired Allergan for $70.5 billion creating one of the world’s largest pharmaceutical companies. The combined firm anticipated revenues around $23 billion during 2015. Some excerpts from Actavis.com Supporting the growth of this innovative industry model is our strategically focused R&D engine, built on novel compounds in specialty and primary care markets where there is significant unmet medical need, and fueled by approximately $1.7 billion in annual investment. With an innovative product development portfolio exceeding 20 near-term projects and a world-class generics pipeline, which continues to hold an industry-leading position in First-to-File opportunities in the U.S. and more than 1,000 marketing authorizations globally, we are uniquely positioned within our industry to ensure our development activities support sustainable long-term organic growth. Subsequently, Teva Pharmaceutical (NYSE: TEVA ) an Israeli based pharmaceutical company acquired the generics unit from Allergan for $40.5 billion thereby giving the much needed cash infusion to Allergan to reduce its debt level according an article in Wall Street Journal. Bristol Myers Squibb a market leader in oncology recently acquired Flexus Biosciences a privately held biotechnology firm company which specialized in discovery and development of cancer medications for $1.25 billion. Eli Lily acquired Elanco, animal health division of Novartis for $5.4 billion partly funded by cash and debt. According to Eli Lily: Upon completion of the acquisition, Elanco will be the second-largest animal health company in terms of global revenue, will solidify its number two ranking in the U.S., and improve its position in Europe and the rest of the world. With a presence in approximately 40 countries and 2013 revenue of approximately $1.1 billion, Novartis Animal Health is focused on developing better ways to prevent and treat diseases in pets, farm animals and farmed fish. Lilly will acquire Novartis Animal Health’s nine manufacturing sites, six dedicated research and development facilities, a global commercial infrastructure with a portfolio of approximately 600 products, a robust pipeline with more than 40 projects in development, and an experienced team of more than 3,000 employees. Regeneron Pharmaceuticals has entered into collaborative deals with Bayer Health care for treatment of eye diseases, according to Regeneron.com. The companies will share the cost of developing the products as well as the profits. Renegeron and Sanofi have entered into immune-oncology collaboration with Sanofi providing 165 million for research and development of products in this field. Investment Risks: The risks are high since all stocks are concentrated in one sector. The big pharmaceutical firms face fierce competition with each other in coming up with a major breakthrough in treatments. If FDA does not approve the drugs, the biopharmaceutical companies are likely to experience a steep decline in revenues and earnings. Many of the firms may face litigations if the patient experiences adverse side effects due to the drug usage. The biopharmaceutical may experience a sharp decline in revenues after the patents expire. Future Outlook: According to American Public Health Association (APHA) majority of the deaths in US are related to heart disease, diabetes, obesity, high blood pressure and cancer. Money is spent more on treatments rather in prevention. It is hoped that this trend will be reversed as more and more people have health insurance and can afford to spend money on preventive health care. The Affordable Care Act, 2010 has the goal of expanding insurance coverage in US and it is hoped that the coverage will reach 24 million by 2023. The increased health care coverage will likely result in greater doctor and hospital visits. The average life expectancy is around 79 in United States according to World Bank estimates. Baby boomers are expected to spend substantially on health care treatments while Millinnials are likely to spend on preventive health care. Being the recipient of the additional funds spent by Baby boomers, Millennials, and Generation X, the Health Care Sector will continue its stellar performance well into the future. The VGHCX fund which has stakes in well established companies large cap companies will likely reap the benefits of trends in health care industry. With a majority of investments in large stable pharmaceuticals with a median market cap of 40 billion, the VGHCX fund will likely continue its trend of double digit growth rate in earnings and revenues. The fund is trading at approximately 8% below its all time high. With a PE ratio above industry average, the fund still looks expensive. In my opinion, investors can monitor the NAV and add positions when there is a temporary pull back of at least 10% to 15% of NAV. The markets are volatile and there are plenty of opportunities for investors to add positions on a day the market indexes slump. This actively managed fund with the optimal mix of winning companies within the health care sector will be a great investment choice for the long term. Scalper1 News
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