Investing in Health Care

Today I’m not going to write about our country’s economic crisis; everyone else has done that.  And I’m not going to reiterate my conviction that the worst of the bear market has passed, and that the future for many stocks will be very good from here.  Savvy investors know that the best stocks will lead the way higher long before the man on the street loses his recently reinforced fear of investing.

So today I’m looking ahead, and focusing on one of our country’s other great challenges, health care, where I see reason for optimism.

Back in November, discussing the problem of escalating health care costs, I wrote the following:

“The root of the problem, in my opinion, is that we confuse the right to decent health care for everyone–which we as a country can afford, with the right to the very best health care–which we as a country absolutely cannot afford.  And with the consumer insulated from the actual costs of health care, the mechanism that regulates demand in other industries is lacking.  So we continually use more health care than we can afford, and then fail to recognize that our insatiable demand is the reason for the ever-increasing costs.”

In response, one of my readers, J. R. from Illinois, wrote this:

“To achieve maximum health, emphasis on different approaches is needed.  The medical-pharma system we have is a wasteful failure in every respect.  Most of all it overlooks the simple fact that a healthier lifestyle is by far the most cost-efficient and successful approach.  The AMA convinced a generation of fools that all they had to do was rely on the M.D. and his pills and hospitals.   The second problem is that natural substances that work cannot be patented and therefore turned into great profit, so they are ignored.  This is where the market approach really fails.  We are being sold a bill of goods, one that is often deadly.  A new paradigm is desperately needed.”

He’s right, of course. 

If we were all truly sensible about our health, we’d eat more fruits, nuts and vegetables.  We’d eat less sugars, fats and refined flours.  We’d eat smaller portions as well.  We’d exercise.  We’d walk more and drive less.  And we’d take the stairs instead of the elevator.

But as country, we don’t.  The majority of Americans are overweight; 32% are technically obese.  And there is no direct economic penalty for the bad decisions we make!  Instead of taking responsibility, we’ve ceded responsibility to the “experts,” ignoring the fact that those experts often have a conflict of interest.  As a result, our health care costs continue to climb faster than any other major segment of the economy.

Yet I’m optimistic about the future of health care, for two big reasons.  The first, ironically, lies in the recent collapse of our nation’s financial institutions.

Current Trends Can’t Last Forever
Less than a year ago, when my second daughter was a senior in college majoring in journalism and international relations and looking for guidance on the real-world employment situation, she remarked that visiting the college career office was a waste of time.  “All they’ve got are jobs in investment banking.”

Less than a year ago, there was plenty of money flying around in that industry, money that was drawing the best and brightest into a career that produced … um… well, you know.

Today, I’m glad my daughter stuck to her own interests and wasn’t seduced into a job in investment banking.  Today she has a job that challenges and satisfies her, while many of her classmates who went into investment banking are no doubt hauling out those resumes again and looking for industries that are not imploding.  And where might they end up?

I’m guessing some of them will end up in the health care industry, which continues to grow every year.  And I expect that some of them will use their brains to make some important changes there, like rewarding people for staying healthy!

The second reason for optimism on health care lies in the marriage of information technology and genetic technology.

We all know how the computer and the Internet have changed the world in recent decades, creating millions of jobs while enabling increased productivity in most sectors of the economy.  Information technology has already made substantial improvements in the health care industry as well … but I think the best is yet to come.  I see great potential for genetic medicine to unravel the roots of illness.  I think the insights gained through genetic studies will help us learn better how we can stay well.  And I think that applying information technology to the challenges of the industry will actually lead to improved productivity for America!

In fact, I ran across something interesting recently in Technology Review, the magazine of Massachusetts Institute of Technology.  In it, University of Chicago economics professor Austan Goolsbee recounted that if a time-traveler went back to 1910 and told people how many phone lines would exist today in the U.S., they would say it would be impossible, because every American would need to be a telephone exchange operator!  Americans in 1910 couldn’t see, of course, that telephone operators would be put out of work by technology.  And they couldn’t imagine that such job-destroying technology would be a good thing!  But here we are, and does anybody want to go back to 1910?   Job destruction and job creation are healthy byproducts of an always-improving society, and we should welcome them.

Today, according to Goolsbee, “There’s a joke within economics that 40 years from now, every economist will be a health-care economist, because if you simply extrapolate from the current trend, the whole economy will be health care.”  We know, of course, that that won’t happen.  But we can’t yet see the details of how we will improve our health without consuming an increasing part of our budget.  Yet it will happen!  And the upside, according to Goolsbee, is that improved health will add tremendously to productivity.

He says, “I could easily see some emerging combination of medical science, biotechnology, and computing as the foundation for much of our economic growth going forward.”

Admittedly, there will be challenges along the way, not least of which will be the ethical questions that arise when technology leaps ahead of cultural norms.

But when I look at the advances made in unraveling the genetic mysteries of our bodies, most made just in the past decade, I can see the foundation of a great wave of progress focused on keeping people healthy rather than fixing people who are sick.

That’s one reason my favorite investments today are in biotechnology and genetic technology.  The other reason is that these stocks are strong!

And now a tip, which was passed on by a kind reader.  If you’re wondering whether there might be a better plan for your Medicare Plan D dollars, check out  It’s useful and it’s free.

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One attractive genetic technology company–which I told you about two weeks ago–is Sequenom (SQNM).  This little company earned a spot in Cabot Top Ten Report several times in recent months as it bucked the broad market’s downtrend, and it’s still holding up today.

Sequenom started out as designer and manufacturer of genetic analysis systems … and this business is growing.  The company pulled in revenues of $12.9 million from these systems in the second quarter.  But the big story is that Sequenom has developed a test for Down syndrome that is performed earlier than traditional amniocentesis, that is less invasive, and that is extremely accurate.

The size of the amniocentesis market, by the way, is approximately $2 billion!  If Sequenom gets a good part of this market by offering a better test, its revenues could go through the roof.

But it’s still performing tests on patients to prove the test’s accuracy. In the first 201 patients, the company’s test correctly identified all 10 cases of Down syndrome, while recording zero false positives.

And two weeks ago the company announced that of the next 219 patients, the company achieved 100% accuracy with no false positives and no false negatives.  Perfect.

The company expects to test between 3,000 and 5,000 samples before launching the test commercially in the middle of 2009.

Two weeks ago, I wrote, “The stock has been acting extremely well in the last three months, hovering in the low 20s as the market fell apart.  It’s a very promising pattern.  Short-term, however, the biggest factor is tomorrow’s analyst and investor briefing, in which the company might release information that moves the stock.”

And move the stock it did, boosting it from close of 20.41 on the previous day to a high of 29.14 on September 25.  Since then the horrible action of the broad market has helped pull the stock back down to its base again; it fell through its 50-day moving average at 22 today but found eager buyers under 21.

If you bought before the spike, have no fear; you should sit tight here.  And if you’re not on board–and you’ve got cash to spare–I suggest you consider a small investment here.  The long-term potential of genetic medicine, combined with this firm’s expertise, means it could go far in the years ahead.

Editor’s Note: Sequenom may not appear here again but it will be mentioned in every issue of Cabot Top Ten Report until Editor Michael Cintolo recommends selling.  If you’re looking for the leaders of the next bull market, I suggest you try a trial subscription to Cabot Top Ten Report.  It brought subscribers Hansen Natural, Crocs, First Solar and many more leaders, and it’s guaranteed to bring you the leaders of the next bull market as well.  To get started with your no-risk trial subscription, simply click the link below.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory


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