Benjamin Franklin said there were only two things certain in life: death and taxes. If we were adding a third certainty it would be illness. At some point, we will all need to access some aspect of the healthcare industry.
Everyone gets sick and no amount of fluctuation to the global economy will change this. For this reason, the health sector is largely regarded as both a stable and defensive investment option.
Consistently one of the best-performing sectors in terms of growth, it is made up of diverse, separate industries; all united by the same goal of helping to improve the health and wellbeing of its customers.
Big pharma might be the first industry to spring to mind, but medical devices, hospitals, healthcare services and biotechnology all fall under the vast umbrella of the healthcare sector.
The UK National Health Service
One of the most heated debates, and a political hot potato, is the UK health industry and the greater involvement of for-profit companies in the NHS. Outsourcing of services to private companies is not something new, but post-Brexit the door is open for insurers and private health companies to provide NHS services.
A Health Foundation report found that £1 in every £8 of local commissioner's budgets in England is now spent on care provided by non-NHS organisations.
Anita Charlesworth, director of research and economics at the Health Foundation, said rising demand for emergency care meant “NHS providers haven't had the capacity to deliver planned care and patients had to be diverted outside the NHS.”
Giant multinationals started circling years ago. The Hospital Corporation of America (HCA) has been forging a partnership with the NHS since 2006. With a market capitalisation of more than $28bn, the UK arm is part of the Private Hospitals Alliance, a lobbying group that supports the role of private company participation in NHS services.
US companies Tenet Healthcare and UnitedHealth Group have also built relationships within the NHS. Tenet noted to investors in 2015 that “privatisation of UK marketplace, given market inefficiencies and pressures on the National Health Service, should create organic and de novo opportunities” for the US company.
This year private-sector companies were invited to bid for 14% more NHS contracts than last year and winners included VirginCare, Care UK, Acadia Healthcare, Circle, Capita and Interserve.
LaingBuisson, the industry analysts, put the figure for the market for primary and community care in the NHS at £10 to £20bn a year.
Growth in the health sector has been facilitated by the ageing of the population and because more people are living longer with chronic diseases.
There was concern that the baby boomer ‘time bomb’ would change the shape of investment as they sell off their portfolios as they retire. Now, though, investors are waking up to the potential growing customer base this ageing population creates, especially for sectors such as healthcare, technology and insurance.
In the US, the cost of many medical equipment products are covered by a policyholder’s health insurance and, like so many industries in this sector, they are not affected by economic downturns.
Unique patented products usually quickly gain a large market share so come with higher price tags. This gives investors a good return on their money.
AxoGen, for example, offers patients surgical solutions for peripheral nerve injuries. Potentially a $1.6bn market, the company reported $12.2m in sales for the first quarter of the year.
Edwards Lifesciences Corporation’s history dates back to 1958 when it developed the world’s first replacement heart valve. Today they corner the market for tissue replacement heart valves and repair products. Projected global sales this year are $3 to $3.4bn, representing underlying growth of 10 to 14%.
The company estimates that the total market for its device will double to $5 billion in 2021.
They are not the only company expecting a boom in sales. The number of patients requiring treatment for cardiovascular disease and critical illnesses is increasing dramatically. This is due not only to an ageing world, but improved diagnostic techniques that allow physicians to detect problems sooner.
What affects the sector’s share prices?
As it is not affected by the vagaries of the global economy, tighter regulation and clinical data results are usually the driving pressures on share prices. Landmark trial results can see a company’s share price soar.
What can make one company buck the trend?
Technology is one area where companies can buck the trend in the healthcare industry. One growth area has been the development of apps and devices aimed at helping older adults live independently in their own homes.
Despite a long-standing belief that you can’t sell technology to the elderly, the sheer size of the market has begun to attract investors. Technologies, such as artificial intelligence and virtual reality create a world of possibility for patients with dementia and chronic disease meaning older people could be monitored remotely.
It seems that there is plenty of opportunity in the $84bn in-home care provider market.
Hometeam utilises technology to match up older people and in-home caregivers and provide more visibility into what occurs in clients’ homes. The company aims to rethink how in-home care is administered to older people and the two-year-old healthcare start-up has raised $43.5m to date.
Last year, Honor - a Silicon Valley-based company that also helps connect older people to home care professionals - raised $42m.
Taimur Hyat, chief strategy officer at PGIM, the $963bn global investment management businesses of Prudential Financial, said: “The first wave of tech and apps was designed with Millennials in mind — pizza delivery and Uber. The next wave of platforms and technology will be designed with the needs of the elderly in mind. We’re already beginning to see this as a nascent opportunity.”
What can make a company's share price fall?
For pharmaceutical and biotech companies, negative clinical trial data can make the share price fall as can regulatory warnings or patent expiration.
Medical device and technology companies also need to undergo rigorous research and development so are also affected by the patent cliff phenomenon. This can see an abrupt drop in sales as new competition floods a market.
What should I look out for in company accounts?
Like in most sectors, companies that are generating profits and have sufficient cash flow to pay for research and development will continue to grow.
In industries that produce medical devices, a strong culture of innovation is vital and investors should look at the product pipeline as well as paying attention to patent expiration dates for more successful products.
For facilities such as hospitals and clinic services in the US, the bad-debt ratio is an area of focus for investors. Many hospitals are faced with bad debts impacting their profitability. Cost controls are another area that can impact on profitability.
What else is there to watch out for?
Nearly two-thirds of the world's elderly live in the developing world, and that share is growing. In addition, the United Nations projects that the number of Chinese over the age of 65 will exceed the entire current US population by 2045.
Hyat said that investors should consider capitalising on the opportunities arising from this unprecedented global demographic shift of an ageing world.
He said: “Biotech is probably the most obvious example, as venture capital firms invest in operating companies targeting diseases such as cancer, Alzheimer's and Parkinson's.
“Nevertheless, patient, long-term investors have the opportunity to generate sustained alpha by investing behind the ageing megatrend.”