One has to look no further than this morning’s news of an ambitious healthcare tie-up between corporate giants JP Morgan, Amazon and Berkshire Hathaway to understand just how big an issue runaway healthcare spending is becoming for both corporations and governments across the developed world.
But with no signs of spending slowing down in the US, UK or anywhere else, investors looking to benefit from this trend will find plenty of potential opportunities. One that I’ve got my eye on is UDG Healthcare (LSE: UDG), which is a provider of non-core services such as commercial marketing, packaging and communications for global drug makers.
UDG has benefited from these customers moving to outsource these essential but non-core services as a means of improving margins under relentless shareholder pressure. This trend, together with a slew of acquisitions that have turned it into a global leader in its markets, has sent the group’s share price up 25% over the past year alone.
Judging by the company’s Q1 trading update released this morning, investors have been right to be bullish as management is guiding for a whopping 18%-21% uplift in earnings per share for the full year to October. The group’s commercialisation division, Ashfield, is the main driver of growth and management said its operating profits were significantly ahead of the prior year’s due to acquisitions and organic growth as drug makers continue to bring huge volumes of new treatments to market.
While there were short-term issues with the packaging division, management expects these to reverse in H2 which, alongside falling US tax rates and growth in other divisions, should still leave investors very happy for the full year. With industry tailwinds at its back, a healthy balance sheet providing ammunition for further acquisitions, and massive growth opportunities, I think UDG Healthcare is still attractively valued even at 25 times forward earnings.
Underpinning critical research the world over
Another healthcare stock on my radar is research tool provider Abcam (LSE: ABC). It provides academic pharma and biotech laboratories with research-grade antibodies that they need to conduct experiments.
This proposition has proven very attractive to scientists in recent years and as a result, Abcam has been growing very rapidly. In H1 alone revenue was 10% ahead of the year prior as each of its product categories grew sales faster than overall market growth.
Future growth opportunities also exist in broadening the group’s geographic reach, particularly in the massive Chinese market. Last year China accounted for only 13% of group revenue, but the country is becoming increasingly important with sales in the region up 24% year-on-year in H1.
There’s also the possibility of organic growth continuing to be buttressed by selective acquisitions that are well within the group’s capabilities. At year-end it had a pile of cash totalling £84.8m. And closing cash balances were well ahead of the year prior due to the highly profitable nature of the company’s business, with EBITDA margins of 32.5% recorded last year.
Abcam’s shares aren’t cheap at 39 times forward earnings, but with significant cash generation, impressive margins and continued double-digit sales growth, I think the business is still one I’d love to own for the long term.