It’s true that generic drugs are a form of drug commoditization in the health-care industry, and their presence does threaten to drive down branded-drug developers’ margins. However, with the drug development process shortening, as well as the presumption that in-lab research costs will continue to fall, the amount of new drugs that could find their way to market over the next decade could dwarf the number of drugs set to fall off the patent cliff. This should negate a significant portion of the gross margin pain often associated with the introduction of generic medications.
The effects against commoditization are even more readily apparent in medical device makers. Intuitive Surgical, Inc. (NASDAQ:ISRG), manufacturer of the da Vinci surgical system, offers the only commercially profitable surgical robotic system. Period! With few competitors on the horizon and an incredibly complex technology, I’d say its market share is safe for quite a long time.
Source: Morningstar.
One of the greatest aspects of companies that can avoid industry commoditization is that they often boast huge margins. With few downside pressures other than its own research and development costs, Intuitive Surgical’s gross margin has been a model of consistency since 2004.
5. International markets are largely untapped
You can actually make a strong point about emerging markets being a growth source for a multitude of industries, but few offer the growth potential that brand-name pharmaceuticals can bring to the table. Some of the most basic illnesses continue to go untreated in emerging-market countries around the globe and offer a jumping-off point for growth beyond just domestic markets.
One company that’s taking the bull by the horns in expansion abroad is Merck & Co., Inc. (NYSE:MRK). Merck’s annual report, filed earlier this month, demonstrates that it now generates 57% of its total revenue abroad. Burgeoning growth markets like India and China are where Merck’s investment dollars are currently headed, with opportunities seen in cholesterol and diabetes medications, which are highly contested and largely saturated (no pun intended) in the United States.
Merck’s fourth-quarter results continued to highlight this trend, with emerging-market growth up 9% and now accounting for 20% of total sales. Revenue generated from China soared 35%. This is notable as a report by research firm McKinsey & Co. that was noted by Bloomberg estimates that Chinese health care spending may nearly triple from now until 2020 and hit $1 trillion. If you head where the investment dollars are headed, you’re likely to succeed.
The article This Sector Is Your Best Investment Over the Next Decade originally appeared on Fool.com and is written by Sean Williams.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Fool owns shares of and has written covered calls on Medtronic. Motley Fool newsletter services have recommended buying shares of Intuitive Surgical.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
