With a wide range of sub industries and services meeting the requirements of billions of people, healthcare is one of the biggest and most complicated sectors in the world.
Because the healthcare industry is always changing and is open to new trends, laws, and technologies, investing in it can offer both opportunities and challenges for healthcare investing.
In this article, we’ll examine some of the variables influencing the health care industry’s performance and future outlook, as well as how investors should choose and assess the top healthcare investing stocks.
In a Nutshell | Healthcare Investing
- Pharmaceuticals, biotechnology, medical devices, health insurance, hospitals, and healthcare services are just a few of the diverse components that make up the healthcare industry.
- Numerous elements, such as demography, economics, politics, technology, and consumer preferences, have an impact on it.
- As the global population ages, incomes rise, and new therapies and technologies are developed, it is anticipated that the healthcare sector will expand in the coming years.
- The healthcare industry also has to contend with concerns like rising expenses, hazy regulations, moral dilemmas, and intense competition.
- Healthcare investing companies can be compared and evaluated by investors using a variety of measures and analysis techniques, including dividend yield, earnings growth, margins, valuation ratios, and potential for innovation.
Trends in the Healthcare Sector | Healthcare Investing
When thinking about healthcare investing, consider the following prevailing trends: Changes or the continuation of these trends may have an impact on various areas of the healthcare industry.
Positive trends include:
Negative trends include:
- the aging population and the baby boom generation
- people living longer with chronic diseases
- the epidemics of obesity and diabetes
- technological advances
- the global reach of diseases
- personalized medicine
- a single payer system (Medicare/U.S. government)
- the uninsured
- cost control
- consumerism
Pharmaceuticals | Healthcare Investing
Both pharmaceutical and biotechnology companies manufacture “drugs” but they differ in the way they create them. Pharmaceuticals are usually thought of as small chemical compounds that can easily pass through the membranes or barriers of the body. Biotechs, on the other hand, are usually thought of as large protein compounds that have a hard time getting through membranes.
Investing in early stage healthcare companies comes with two intertwined kinds of risk, capital risk and impact risk (the risk a new treatment fails to reach patients and the impact is never realized.
Forbes Finance Council
Most of the time, these companies spend a big chunk of their income on research and development (R&D) to find new compounds. The “hit ratio” is very low because finding new compounds is hard and takes a long time.
When investing in pharmaceutical companies, there are several things to consider. You have to have some understanding of:
- the underlying disease or condition that a specific drug treats
- the number of people affected
- the number of compounds currently available
- the discovery and commercialization process, specifically the rigorous clinical trials required by the Food and Drug Administration (FDA)
- the availability of substitutes, including generic versions of drugs
- patents
- the overall marketing framework, which may include revenue or profit sharing arrangements with other companies
The results of clinical trials have a big impact on this sector, and unexpected results can have a big effect on the stock price. Positive surprises (clinical data that is better than expected, a shorter time to market, etc.) can make the stock go up a lot in a short amount of time, while negative surprises can make the stock go down.
Also, information like the number of prescriptions written, the market share, FDA warnings, or the loss of a patent after a drug has been released will affect healthcare investing. This is a sector that requires active vigilance on the part of the investor.
Who Pays the Bills? | Healthcare Investing
Health insurers are the companies that pay the bills, more or less. Companies take out health insurance in two different ways:
- The purchasing company assumes the risk of paying all invoices.
- The health insurance company assumes the risk.
The choice of a company can affect its risk and profitability. Underwriting capacity drives the profitability of health insurers. The premium (or payment) from the buying company will cover less of your medical costs if the underwriting is better. The key ratio reported by health insurers is the medical cost ratio. This ratio is similar to the operating profit ratio and should be considered a trend analysis.
The medical loss ratio is also an important ratio and is similar to the gross margin, only in reverse (lower ratios are better). In addition, it pays to invest in a company with conservative and reliable management, as there are often time lags between when medical services are consumed and when bills are paid.
Adequate liability reserves are also an important measure to review. These reserves are generally more stable and less susceptible to surprises than drug reserves. However, it is important to follow government regulations, particularly bills related to Medicare and Medicaid financing, since the U.S. government is the single largest purchaser of healthcare services.
The House Ways and Means Committee is the part of the government that affects Medicare legislation. In addition, the Democratic Party is often perceived as being less favorable to healthcare companies than the Republican Party, and industry stocks often react to changes in the parties’ control of government.
Facilities | Healthcare Investing
Medical providers, hospitals and clinics are the cornerstone of healthcare in the United States. U.S. law requires all facilities with emergency rooms to treat anyone who walks in the door, regardless of whether they have health insurance or money to pay for services.
This legislation has created strong competition for hospitals in the form of freestanding clinics and specialty hospitals, which do not have emergency rooms and, as such, are not required to serve everyone.
These clinics can choose which patients to treat and benefit from higher payments from insurance companies. Meanwhile, hospitals face bad debts that affect their profitability. The bad debt ratio is an area of interest for investors.
In addition, cost control is key to hospital profitability. Many hospital systems have yet to incorporate technological advances such as electronic medical records, appropriate purchasing, and operating systems into their normal operations, although this appears to be changing.
Advertisement
Controlling costs across numerous cost centers is very difficult for hospitals. Those that do it well and incorporate IT systems are often considered the best managed.
In addition, hospitals that are successful in recruiting specialty physicians, such as neonatologists, are able to increase their EBITDA per bed, as specialty physician practices typically obtain higher payments for services rendered. In addition to delinquency ratios, EBITDA per bed and utilization, or overall capacity ratios, are other important metrics.
Other industries | Healthcare Investing
Pharmacy benefit managers (PBMs) are companies that administer pharmacy benefits on behalf of insurers. They work with the insurer and can be thought of as a part of health insurance that is outsourced.
Generally, when you go to the pharmacy to have a prescription filled, the pharmacy contacts (by computer) your PBM to see if you are covered for that particular drug. Also, if you receive your medications by mail, they usually come from the PBM’s distribution center.
PBMs usually make more money when they send and receive emails and fill generic prescriptions because they get a higher margin for those services. In addition, PBMs receive higher margins for specialty drugs, such as those that are injected (such as biotechs) or those that require refrigeration and are not typically sold at a local pharmacy (because these types of drugs require more attention). Therefore, PBMs that have a large specialty pharmacy component tend to have higher margins.
Distributors act as middlemen between the companies that make drugs and the pharmacies that sell them. In exchange for managing logistics for pharmaceutical companies, they are paid a service fee. Many distributors also have other lines of business that improve margins, such as packaging some of the drugs, but the service fee margin is the main driver of profits.
Companies that make medical devices and technology make a wide range of medical products, from bandages to artificial joints to heart stents. These companies, like drug manufacturers, spend a large percentage of their revenues on R&D, and some have to follow the same clinical trial path.
Investing in these companies requires knowledge and analysis of the new technology, as well as knowledge of competitors and known substitutes. Like other technology companies, a company’s success can be measured by how many people use it and how much money it makes.
Wrap Up | Healthcare Investing
Healthcare investing can be rewarding, but also risky, as the sector is dynamic and complex. Investors need to understand the drivers and trends that shape the healthcare industry, and the strengths and weaknesses of each healthcare segment and company. By doing so, investors can find the best healthcare investing stocks to buy and benefit from the long term growth and innovation of the sector.
FAQs | Healthcare Investing
A variety of segments, including pharmaceuticals, biotechnology, medical devices, health insurance, hospitals, and healthcare services, make up the healthcare industry. Each market has unique traits, possibilities, and difficulties.
A number of elements, such as demographics, economics, politics, technology, and consumer preferences, have an impact on the healthcare sector. The demand, supply, and financial success of healthcare goods and services can be positively or negatively impacted by several factors.
As the global population ages, earnings rise, and new medical procedures and technology are developed, it is anticipated that the healthcare sector will expand in the future. Personalized medicine, emerging markets, digital health, telemedicine, and aging and chronic diseases are just a few of the significant trends and prospects in this field.
The healthcare industry faces a number of risks and obstacles, including escalating costs, unclear regulations, moral dilemmas, and intense competition. The profitability and sustainability of healthcare organizations as well as the quality, accessibility, and cost of healthcare products and services may all be impacted by these difficulties and hazards.
Investors can evaluate and compare healthcare healthcare investing stocks using a variety of techniques and indicators, including dividend yield, earnings growth, margins, valuation ratios, and innovation potential. Investors should diversify their portfolio across several geographies and healthcare sub industries and take into account the individual trends and factors affecting each segment and company in the healthcare investing sector.
Article sources
At Capital Maniacs, we are committed to providing accurate and reliable information on a wide range of financial topics. In order to achieve this, we rely on the use of primary sources and corroborated secondary sources to support the content of our articles.
Primary sources, such as financial statements and government reports, provide firsthand evidence of financial events and trends. By using primary sources, we are able to directly reference information provided by the organizations and individuals involved in these events.
Secondary sources, such as financial analysis and commentary, interpret and analyze primary sources. While these sources can be useful for providing context and background information, it is important to use corroborated sources in order to ensure the accuracy and reliability of the information we present.
We take pride in properly citing all of our sources, both primary and secondary, in order to give credit to the original authors and to allow our readers to verify the information for themselves. We appreciate your trust in our website and are committed to upholding the highest standards of financial journalism.
- Deloitte – 2020 global health care outlook
- United States Census Bureau – The U.S. Joins Other Countries With Large Aging Populations
- Office of Disease Promotion and Health Promotion – Older Adults
- U.S. National Library of Medicine – Technology and the Future of Healthcare
- U.S. National Library of Medicine – Informing the Future: Critical Issues in Health: Second Edition
- U.S. National Library of Medicine – Current Trends in Personalized Medicine and Companion Diagnostics: A Summary From the DIA Meeting on Personalized Medicine and Companion Diagnostics
- KFF – Public Opinion on Single-Payer, National Health Plans, and Expanding Access to Medicare Coverage
- Harvard University – Number of uninsured Americans appears to be on the rise
- HealthAffairs – Health Care Cost Control: Where Do We Go From Here
- Science Direct – Drugs, Devices, and the FDA: Part 1: An Overview of Approval Processes for Drugs
- McKinsey and Company – The secret of successful drug launches
- U.S. Food and Drug Administration – Drug Approval Process
- ResearchGate – Stock Market Returns and Clinical Trial Results of Investigational Compounds: An Event Study Analysis of Large Biopharmaceutical Companies
- McKinsey & Company – Underwriting excellence: The foundation for sustainable growth in health insurance
- CNBC – Health care wins and stocks rally as Democrats take control of the US House
- U.S. National Library of Medicine – The Emergency Medical Treatment and Active Labor Act (EMTALA): what it is and what it means for physicians
- HealthAffairs – State Regulation Of Freestanding Emergency Departments Varies Widely, Affecting Location, Growth, And Services Provided
- U.S. National Library of Medicine – The impact of health information technology on patient safety
- U.S. National Library of Medicine – US Approaches to Physician Payment: The Deconstruction of Primary Care
- New York Senate – Final Investigative Report: Pharmacy Benefit Managers in New York
- Portland State University – Fee-For-Service Contracts in Pharmaceutical Distribution Supply Chains : Design, Analysis, and Management
- Statisa – Worldwide medtech research and development spending as percent of medtech revenue from 2011 to 2024