Where’s the Bottom? Has Anybody seen the bottom?


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Where’s the Bottom?  Has Anybody seen the bottom?
 
History.
 
We seem to be making a lot of it lately.  And, it’s coming in various forms with varying degrees of implication for investors and the Healthcare industry.
 
Consider some of the historical ignominies that we are experiencing as we “crash” through the mid-point of 2008:
  • The DOW Jones Industrial Average experienced its worst June on record since 1930;
  • Job losses in the U.S. economy were at their highest levels in 30 years;
  • The U.S. dollar is valued at its lowest level in history against major world currencies;
  • The second quarter of 2008 was the first quarter since 1978 without an IPO (in fact, the last IPO completed was for a healthcare I/T company.  Does anyone remember which one?);
  • Commodity prices are at their highest level in history, and the full effect of this inflation has only begun to impact the most important sectors of the economy – Consumers;
  • The global credit markets are paralyzed;
  • The U.S. Current Accounts deficit is at its highest level in history; 
  • The U.S. Trade deficit is at its highest level in history; and…
  • The last time the Chicago Cubs owned the best record in the National League as late as 30 June was 100 years ago, during the World Series season of 1908.
Clearly, these are realities of historic proportion.  Taken together (especially with the last one), they may even be signs that the Apocalypse is upon us.
 
But we think differently.  We think that there is opportunity amidst the ashes.  In particular, the Global Healthcare Industry may be a great beneficiary.
 
To us, the most ominous sign of the current market disruptions is NOT the job losses, or the inflation, or the dearth of IPOs.  No question that those are painful developments, but they are also episodic – they will be solved through conventional policy shifts, fiscal stimulus, or legislative changes.
 
Instead, we think that the most challenging of the current historical realities is the fact that many of the industries upon which the U.S. economy depends are undergoing deep, disruptive, structural reform.  Automobiles.  Airlines.  Energy.  Financial Services.  Unlike solutions for immediate fiscal challenges, the fixes in these industries will be generational.  Irrespective of how these industries have behaved in the past – the entire social and economic structure around which these industries were built – the changes will be epic. 
 
Healthcare, too, will change. 
 
But certain things will always be true about healthcare.  And in those realities, there is comfort, there is growth, there is profit, and there is value.  No matter what. 
 
Let’s illustrate what we mean:
  • Healthcare is the largest market in the world;
  • As an industry, Healthcare will continue to experience the highest sustained growth rates over the long term;
  • Science and innovation are accelerating around the world;
  • As economies such as China, India and Russia transition from their industrial-orientations to become more consumer-driven, Healthcare will be a primary opportunity;
  • Because Healthcare is chronically capital deficient, the global investment environment in healthcare is more stable – no bubbles, no crashes;
  • The technology-based productivity – along with all of its associated benefits -- that has impacted so many other industries, has yet to be realized in Healthcare (see AOL Founder and Revolution Health CEO Steve Case’s article in Modern Healthcare);
  • The greatest medical advancements in the human experience are upon us.
Amidst the swoon in the capital markets during the first half of 2008 – with certain sectors trading at 40% beneath their levels on 1 January, the attractiveness of Healthcare as investment was re-enforced by the fact that the sector is only off 1.8% for the year.  Whatsmore, certain bellwether companies such as J&J (NYSE:  JNJ), Genentech (NYSE: DNA), Abbott (NYSE: ABT), and Baxter (NYSE: BAX) are trading within 5% of their 52-week highs.
 
Obviously, there will be pain in the Healthcare industry as well, as we seek to solve structural crises such as Medicare and the un-insured.  And, as investors, we must dedicate ourselves to solving that pesky problem with IPOs, because that threatens so, so much.  (We’ll address this issue in greater depth during the coming weeks.
 
The Bottom Line:  the Global Healthcare Industry is a Bull Market. 
 
As always, you have to pick your holes and know your stuff.  And investors must be prepared to make their gains in different ways than they have in the past.  But the signals are strong and favorable, and we believe long-term investors will persevere in this market.
 
Now, as for the Cubs…