Strong domestic demographics support operations at home: A doubling in the proportion of Australians older than 65 is set to underpin earnings for health care companies in the longer term, as beyond that age people become a large consumer of health-care services.

Evolving policy in key developed markets such as the US promises short-term headwinds as companies adjust to efforts to reduce public spending. Over the longer term policies that increase the number of insured patients should result in rising volumes for companies that provide testing services or market pharmaceuticals.

And growing incomes and awareness in key emerging markets that neighbor Australia provide significant opportunities for growth, particularly in the private health sector, which is growing rapidly in emerging-market countries.

Across the developing world, population growth, increasing life expectancy, growing disease burdens and patients’ demand for treatment are driving reliance on private health care companies.

Through mid-May–when fear of an impending end to the US Federal Reserve’s “quantitative easing” first began to grip the market–Australia-based health care stocks largely tracked the performance of the broader S&P/Australian Securities Exchange 200 Index.

The S&P/ASX 200 has recovered from a significant decline from an all-time closing high of 5220.987 set May 14 to a 2013 low of 4655.960 by June 25. While the main Australian benchmark was selling off by 10.82 percent the S&P/ASX 200 Healthcare Index shed just 3.51 percent.

For the first half of the year the health care group has generated an Australian dollar price-only return of 12.22 percent versus 3.3 percent for the S&P/ASX 200.

Although the US dollar return is negative 1.42 percent for the S&P/ASX 200 Healthcare Index, Australia-based health care stocks with significant offshore operations will also benefit from a softer Australian dollar.

Below we profile four companies, including two Portfolio Holdings and one new addition to the How They Rate coverage universe, well placed to benefit from long-term growth in health care spending around the world.

Healthy Portfolio

AE Portfolio Conservative Holding Ramsay Health Care Ltd (ASX: RHC, OTC: RMSYF) is our top choice among Australia-based health care names. The private hospital operator has overcome recent changes in domestic health care insurance law, including means-testing for state-provided insurance, by continuing its effective brownfield growth strategy and by growing its profile abroad.

The stock hit an all-time closing high of AUD34.68 on May 17 and as of this writing was changing hands at AUD36.44, approximately USD32.91 based on the prevailing Australian dollar-US dollar exchange rate.

Ramsay recently entered a joint venture with Malaysian conglomerate Sime Darby to expand its footprint into Southeast Asia, positioning itself to capitalize on rising health care spending in the world’s fastest-growing region.

Ramsay also completed the acquisition of a 90 percent stake in Clinique de l’Union, in Toulouse, France, to expand the Ramsay Sante business. It’s an opportunistic move in a depressed European market.

Clinique de l’Union generates annual revenue of about EUR65 million (AUD91.5 million). The acquisition will be funded from internal Ramsay Sante debt facilities and its own cash reserves.

Australia remains Ramsay’s primary market, and here trends are positive as well. Australians are seeing more doctors and having more tests. If the scope of services continues to increase at the rate of the last decade (74 percent), health care will demand an additional 2 percent of GDP by 2023. And health-care spending will be the biggest contributor to Australia’s budget deficit by 2023.

The costs of health and aged care across federal and state governments are expected to almost double over the next four decades. Based on current rates of population growth and aging the cost to governments of care will grow to 14.5 percent of GDP by 2049-50 from 8 percent in 2009-10.

Private hospitals currently treat 43 percent of all hospital patients, of which there were 3.6 million in fiscal 2012. They provide 33 percent of all hospital beds and perform 66 percent of all elective surgery. Of the 664 “Diagnostic Related Groups” undertaken in Australian public hospitals, 660 are performed in private hospitals.

If current rates of growth continue, in 2021 private hospitals will be treating 50 percent of all hospital patients.

According to Australian Productivity Commission 2010 findings, on average treatment in private hospitals costs AUD130 less than in public hospitals. Costs that private hospitals can control are 32 percent, or AUD1,089 per patient, lower than public hospitals.

And where comparable safety and quality data exists, private hospitals are shown to be safer than public hospitals. Private hospitals also offer more timely access to elective surgery, and they conduct more elective surgery with patients from disadvantaged socioeconomic backgrounds than do public hospitals.

An aging population with a growing disease burden is leading to increased demand for health care. At the same time, rising costs across the globe are driving efforts to reform health care systems.

The private sector offers efficient, effective models of health care delivery. Thus an expansion of the traditional private-sector role by way of involvement in public health care delivery is inevitable. This is why Ramsay Health Care’s stock is doing so well.

Management boosted the final dividend for fiscal 2012 by 16.9 percent to AUD0.345 from AUD0.295 for fiscal 2011.

In February Ramsay announced a 13.7 percent increase in its fiscal 2013 interim dividend to AUD0.29 from AUD0.255 a year ago.

Management, based on “strong industry fundamentals” as well as the demonstrated success of its growth strategy, upgraded fiscal 2013 full-year guidance for core NPAT and core EPS growth to 13 percent to 15 percent from a previous forecast of 0 percent to 12 percent growth.

We expect management to announce a final dividend increase of approximately 14 percent when it reports fiscal 2013 results on or about Aug. 23.

Ramsay Health Care, yielding 2.5 percent but with a consistently growing dividend rate, is now a buy on dips to USD34 on the Australian Securities Exchange (ASX) using the symbol RHC and on the US over-the-counter (OTC) market using the symbol RMSYF.

Our other health-care focused Conservative Holding, CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY), has been one of the top performers in the AE Portfolio since we first recommended it in the October 2011 issue.

The biotherapeutics company, whose calling card are its anti-coagulant treatments for patients with hemophilia, has posted a total return in US dollar terms of 96.15 percent from Oct. 14, 2011, through July 12, 2013.

CSL reported net profit after tax (NPAT) for the first half of fiscal 2013 of USD627 million, up 24 percent from USD504 million a year ago. Earnings per share (EPS) grew by 30 percent to USD1.25, while cash flow from operations of USD670 million was up by 24 percent.

Management announced a 35 percent increase in the interim dividend, to USD0.50 per share. Sales revenue was up 7 percent over the prior corresponding period go USD2.5 billion. CSL invested USD190 million in research and development, 14 percent higher than a year ago.

Managing Director and CEO Dr. Brian McNamee described it as “a very productive half-year” and noted that the company has “successfully strengthened our presence in emerging markets.”

Dr. McNamee reaffirmed CSL’s upgraded profit forecast, despite a murky global economic outlook.

Management expects fiscal 2013 NPAT to grow by approximately 20 percent in constant currency terms, while EPS growth “will again exceed profit growth as shareholders benefit from the ongoing effect of past and current capital management initiatives.” CSL expects EPS growth of “approximately” 24 percent.

CSL’s 35 percent dividend increase supports a corresponding increase in our previous buy-under target for the stock of USD35 up to USD47. The company will likely announce a similarly higher final dividend when it reports fiscal 2013 results on Aug. 14, 2013.

We’re making CSL a buy again based on an anticipated final dividend increase of 17 percent, its relative immunity from changes to Australian health care funding changes due to its unique product offering and its strong global growth prospects.

CSL is a buy under USD55 on the Australian Securities Exchange (ASX) using the symbol CSL and on the US over-the-counter (OTC) market using the symbol CMXHF.

CSL also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol CMXHY. CSL’s ADR, which is worth 0.5 of an ordinary, ASX-listed share, is a buy under USD27.50.

Obamacare Diagnostics

Sonic Healthcare Ltd (ASX: SHL, OTC: SKHCF) is the world’s third-largest pathology services provider, trailing LabCorp (NYSE: LH) and Quest Diagnostics Inc (NYSE: DGX). But it’s the only truly global player, with significant operations in the US, the UK, Germany and Switzerland in addition to Australia and New Zealand.

Much has been made of cuts to Medicare spending in the US and the potential impact on medical diagnostics companies such as Sonic. Sonic generates approximately 21 percent of its revenue in the US, where it holds approximately 6 percent of the diagnostics market.

US lab companies are only just coming to terms with the aggregate cuts of 4.95 percent to the Clinical Lab Fee Schedule (CLFS) introduced on Jan. 1, 2013. And the industry has been put on notice that the Center for Medicare and Medicaid Services (CMS) has proposed cuts to the Physician Fee Schedule (MPFS) of 26 percent as well as a more comprehensive review of the CLFS.

Sonic management has already prepared for a significant reduction in US costs, and these steps should help offset the impact of existing funding cuts as well as future cuts that are likely to bedevil the market for some time.

The headline reduction to the MPFS of 26 percent is relatively benign for Sonic, as it applies to just 3 percent to 4 percent of US revenues. And there remains the possibility that this cut will be deferred, as a similar proposal was in 2012.

Of greater concern is the possibility of further revisions to the CLFS.

CMS intends to examine the reimbursement amounts for approximately 1,250 lab tests on the CLFS to determine whether these payments are reasonable in the context of increased efficiencies, technological advances, and changes in the number of lab personnel and supplies required to conduct a test.

The entire review is expected to take five years to complete. Roughly 16 percent of Sonic’s US revenues are governed by the CLFS.

A report by the US Dept of Health and Human Services, using a sample study of 20 tests, found that Medicare paid anywhere from 18 percent to 44 percent more that state Medicaid plans or private insurers for lab tests. An average CLFS cut of 20 percent would impact Sonic’s net profit after tax by 3.5 percent.

But with significant funding pressure on the industry in the US, Sonic is not alone. LabCorp and Quest, as well as Sonic, are in the process of rationalizing their cost bases to account for present and future Medicare compensation changes.

At the end of the day these three may benefit from a further concentration of volumes at the larger labs, as smaller labs with limited scale fold due to funding pressures they’re also suffering, only more acutely.

And volumes may also increase due to more Americans/patients having health insurance coverage under the Affordable Care Act. That’s not to mention the positive impact of a declining Australian dollar.

It’s important to note too that 31 percent of Sonic’s fiscal 2013 first-half revenue came from its home market, Australia, where revenue grew by 5.5 percent, and 25 percent was derived from Europe, which grew by 13.8 percent. Overall earnings before interest, taxation, depreciation and amortization (EBITDA) grew by 6.5 percent in constant currency terms.

Sonic gave full-year fiscal 2013 guidance in August 2012 of EBITDA growth of 5 percent to 10 percent over the 2012 levels of AUD624 million on a constant currency basis.

When it reported first-half results management noted that “after seven months of trading and allowing for larger than expected fee changes in Germany in the second half, unexpected anatomical pathology fee cuts in the USA, lower than expected growth in the USA and Superstorm Sandy impacts” it expects fiscal 2013 EBITDA growth at the lower end of its guidance range.

Despite hurdles in the US Sonic continues to generate substantial cash flow. An evolving US health care market presents challenges, but the company’s position is well established and it could actually stand to benefit in the long run from policy changes. Growth in Australia and Europe, meanwhile, continues to be solid.

Sonic Healthcare, which is yielding 4.1 percent, is a buy under USD13.50 on the Australian Securities Exchange (ASX) using the symbol SHL and on the US over-the-counter (OTC) market using the symbol SKHCF.

Sonic also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol SKHCY. Sonic’s ADR, which is worth one ordinary, ASX-listed share, is a buy under USD13.50.

Expanded Coverage

New to How They Rate coverage this month is Ansell Ltd (ASX: ANN, OTC: ANSLF, ADR: ANSLY), which designs, develops and manufactures a wide range of hand and arm protection solutions, clothing and condoms for industrial workers, health care professionals and patients and consumers.

Operations are organized into four divisions: Industrial, Medical, Sexual Wellness and Specialty Markets.

Ansell, which is based in Richmond, Victoria, Australia, has its operational headquarters in Iselin, New Jersey. Its HyFlex brand has become the No. 1 selling industrial glove around the world since its introduction in 1996. Ansell is also the world’s largest maker of medical gloves.

The Lifestyles SKYN, a polyisoprene non-latex condom, is the only synthetic product of its kind that’s successfully been through clinical trials and has proven to be safe and effective. It’s gained significant market share for being “the closest thing to wearing nothing at all.”

The company reported disappointing results for the first half of fiscal 2013, as net profit after tax of USD57.1 million was 14 percent lower than the prior corresponding period. Revenue growth, excluding acquisitions, was 1.3 percent. Most divisions reported better results in the US, which was offset by weakness in Europe, the Middle East and Africa.

HyFlex sales, which had been the driving force of Industrial division and company-wide growth, slowed to 4 percent due to weak conditions in the European automotive industry, with distributor nervousness translating to inventory de-stocking.

Margins for the Industrial division declined during the period due to extra sales and marketing spending in an effort to build sales teams in emerging markets.

The August 2012 acquisition of France-based Comasec was “disappointing” at the top line but did contribute to earnings before interest and taxation (EBIT) for the segment. More time than anticipated has been spent educating staff about products offered by both Comasec and Ansell.

Management has upgraded its forecast for Comasec’s full-year contribution from “slightly” to “modestly” accretive for fiscal 2013.

The Medical division, after several halves of lagging Ansell’s other three reporting segments, posted the company’s best earnings growth during the first half of 2013, 5.5 percent to USD17.2 million. This is despite the fact that the top line shrank by 4 percent, due mostly to management’s effort to rationalize its examination glove offerings by eliminating redundant products.

Margins expanded due to lower input costs and reduced overhead as well as a volume shift to higher-margin products.

Surgical glove sales increased by an encouraging 4.1 percent, driven by an ongoing conversion from powdered to powder-free synthetic surgical glove. Sales for these products were up 18 percent.

Continuing product innovation, as well as expansion into emerging markets, will drive Medical sales going forward. Management has boosted synthetic surgical manufacturing capacity to support growth.

Ansell’s Sexual Wellness division posted first-half revenue growth of 5 percent to USD114.8 million, highlighted by 7 percent growth in branded condom sales supported by the success of the SKYN brand throughout all geographies.

Margins for the segment were significantly impacted by a major advertising campaign for SKYN, as EBIT declined by 22.9 percent to USD14.5 million. This non-recurring expense should pay off in coming halves.

Specialty Markets, which includes Retail Household, Industrial/Food, Single Use and Military/First Responder products, reported revenue growth of 19 percent to USD102.6 million on the contribution of the Comasec acquisition.

The Industrial division’s fortunes are tied to economic growth, evidenced by fiscal 2013 first-half results muted by trouble for Europe’s automakers. The Medical division, however, has a rock-solid market position, safeguarded by continuing product innovation. It’s the bulwark against the Industrial division’s ebbs and flows.

The Sexual Wellness division potentially represents Ansell’s next major growth driver.

In China, for example, an escalation of HIV, syphilis, genital herpes and other diseases spread through sexual contact is driving demand for knowledge and the establishment of sexual education classes.

And it’s driving demand for condoms in a country where intrauterine devices and sterilization are the mainstays of birth control. Colleges are now holding classes–where students are receiving their first lessons on such topics–and dispensing free condoms via vending machines.

Ansell’s Jissbon condom–acquired along with Wuhan Jissbon Sanitary Products Company Ltd in 2006–stands to benefit from a market that’s forecast to grow by 9 percent annually through 2018 to reach USD1 billion, according to Global Industry Analytics.

Global Industry Analytics estimates that 9.2 billion condoms were sold in China in 2012 and forecasts sales of 14.6 billion by 2013 amid “unprecedented growth” driven by increased expenditure on reproductive health-care products.

Rising disposable income and corresponding concern for health are leading to increased awareness about condom use. And Chinese are increasingly willing to pay more for high-quality condoms.

Wuhan Jissbon, the second-largest condom manufacturer in China with 10 percent market share and annual revenue of USD12 million, is well placed to benefit from condom use growing from a low base.

Ansell has never cut its dividend. In February 2013, along with fiscal 2013 first-half results, management raised the interim dividend by 6.7 percent to AUD0.16. Overall debt is relatively low at 22.3 percent of assets, and short-term maturities are manageable. As of Dec. 31, 2012,

Ansell had USD338 million in cash on its balance sheet and unused credit facilities–renegotiated during the first half of 2013–totaling USD120 million.

A payout ratio of 35.7 percent is outstanding relative to Health Care peers. All told, Ansell merits a “6” according to the AE Safety Rating System. Management has affirmed full-year fiscal 2013 earnings per share guidance of USD1.07 to USD1.12.

Ansell Ltd is a buy under USD17 on the Australian Securities Exchange (ASX) using the symbol ANN and on the US over-the-counter (OTC) market using the symbol ANSLF.

Ansell also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol ANSLY. Ansell’s ADR, which represents four ordinary, ASX-listed shares, is a buy under USD68.