They say that no investment is certain, but those who have ridden the ‘wave of money’ coming into healthcare must be tempted to believe that there are exceptions to the rule.
Commentary on the healthcare industry has tended to reinforce this notion, with several developments making it ‘inevitable’ that healthcare stocks will continue to perform strongly.
There is the aging population that are demanding increasingly longer care; there are the rising expectations in the developed world of a ‘pill for every ill’, which the medical profession and public officials will feel obliged to meet; there is growing demand in the developing world, as those in emerging markets increasingly demand the sort of care enjoyed in the rich nations.
More than just the big names
We’ll look at those claims in a moment. Suffice it to say that “inevitability” is a foreign concept within financial markets – if it were not everyone would be permanently enriching themselves.
This is not to say that the rosy prognosis outlined for investing in healthcare will not materialise, in part or in full. Merely that anyone who plans to invest in healthcare, as with any other type of investment, needs to research the field thoroughly.
But the private healthcare market is about more than just the household name pharmaceutical companies, vital though they are to the industry’s structure. No one who is contemplating buying healthcare shares is likely to be unaware of such giants as Eli Lilly & Co,
British investors may well have a soft spot for GlaxoSmithKline if they ever suffered from conditions such as eczema, asthma and ulcers, the previously-primitive treatments of which were greatly superseded in the laboratories of GSK.
Israeli investors are likely to have a similar fondness for Teva, whose rise in the late Eighties and early Nineties, helped the establishment of the country as a high-tech dynamo.
These and other companies are the source not only of prescription treatments, those that require some sort of authorisation by qualified medical personnel, but also over-the-counter drugs that people can buy for themselves.
Robot assistance for surgeons
However, pharmaceutical businesses, regardless of how large and well-established, represent just one leg of the stool on which the industry rests. The second leg comprises of companies that run hospitals, such as HCA Healthcare; America’s biggest hospital owner, and Tenet Healthcare; one of the largest hospital companies in the southern states of America.
The third leg comprises of what are known, misleadingly perhaps, as “medical devices”. The label suggests we are talking about walking sticks, wheelchairs and bandages. While these items do indeed qualify in this category, technology has greatly expanded its boundaries.
Then there is Intuitive Surgical, which says it was “founded with a simple belief: People needing medical intervention should recover as quickly and completely as possible”. It is best-known for its da Vinci system that provides robot assistance to surgeons.
So, what is the immediate outlook for the healthcare sector and can last year’s strong performance be repeated?
Some believe not, especially with respect to US healthcare companies. While concerns that President Donald Trump may put a ceiling on drug prices or attempt to dismantle Obamacare, the swing to the left of the Democratic Party raises the opposite spectre of the quasi-nationalisation of parts of the healthcare system.
But others are more sanguine. On 23 May, Brad Sorensen of investment group Charles Schwab said; “I still believe with the rancour in Washington that the risks of major legislative changes coming to fruition are relatively low, and that investor fear of such is providing a potential opportunity for investors.”
The positive case for healthcare investing continues to rest on the likely increasing demand in both the aging developed and advancing developing world, combined with the increasing supply as companies invent new treatments and procedures. In that borderland, where pure healthcare merges with treatments for the ailments of longevity and the provision of hospital-type accommodation for the very old, many see particularly fruitful opportunities, not least in dementia research and care-home operations.
But there are a number of caveats to this optimistic view. One is that demand and supply are meaningless without the ability to pay. All the best CARE in the world will sit idle, regardless of how much people may want them, if governments, insurers, individuals or some mixture of the three, have no money.
Medium-term prospects seem bright
The ‘unaffordability’ of European welfare systems has been a topic for some time and such talk may cross the Atlantic in the wake of Obamacare.
Another is the danger that all three ‘legs’ of the healthcare stool will prove to have very different characteristics when the economic cycle eventually turns. While pharmaceutical stocks are likely to display some defensive features, as do food manufacturers, because people cannot manage without their products, this is likely to be considerably less pronounced when considering the more sophisticated medical-device companies. Investors and traders who fail to recognise this distinction could be in trouble.
That said, on balance, the medium-term prospects seem to be bright. In its 2019 Global Health Care Outlook, Deloitte, the professional services firm, wrote: “The adage, ‘What goes up, must come down,’ isn’t likely to apply to the global health care sector in 2019.
“Aging and growing populations, greater prevalence of chronic diseases, exponential advances in innovative, but costly, digital technologies—these and other developments continue to increase health care demand and expenditures.”