Healthcare News: Your Investment Guide

The healthcare sector is a promising field for investors, with its vastness and diversity offering a range of investment opportunities. Healthcare spending accounts for a significant portion of the US economy, and this trend is expected to continue, with projections of a 5.6% annual increase through 2032. The industry is transitioning from curative to preventative care, and the demand for healthcare products and services is expected to soar due to the ageing population and advancements in treatment and technology.

When investing in healthcare, it is essential to understand the different segments within the sector, such as pharmaceuticals, medical devices, health insurance, and healthcare providers. Each segment has unique dynamics and risks that investors should consider. For instance, drugmakers and medical device companies are subject to regulatory approvals, while healthcare providers and insurers face litigation risks.

Healthcare stocks tend to be more stable during volatile economic periods, and the sector is expected to benefit from the shift to telemedicine and digital health. However, it is important to monitor government policies and regulations that can significantly impact the industry.

When deciding where to invest, investors should assess the company's growth prospects, financial strength, valuation, and dividend payouts. It is also crucial to diversify one's portfolio and not overly concentrate on any single stock or sector.

Investing in healthcare stocks vs. healthcare mutual funds and ETFs

The healthcare sector is vast, comprising pharmaceuticals, devices, health insurers, and hospitals, each with its own dynamics. Healthcare stocks can provide generous returns, but investing in this sector can be tedious due to the many factors influencing stock prices.

To simplify the process and reduce the volatility of investing in individual stocks, investors can consider healthcare mutual funds and ETFs. These investment vehicles diversify holdings, providing exposure to a range of healthcare stocks or industries. Here's a comparison of investing in healthcare stocks versus mutual funds and ETFs:

Healthcare Stocks

Investing in individual healthcare stocks can be lucrative but requires careful analysis and active monitoring. Here are some key considerations:

• Industry Understanding: The healthcare sector is diverse, and each industry has unique dynamics. For example, pharmaceutical companies differ in how they create drugs, with pharmaceuticals defined by small chemical compounds and biotechs by large protein compounds. Understanding the underlying disease, number of affected people, available compounds, clinical trials, substitutes, and marketing framework is crucial when investing in drug companies.
• Information Sensitivity: Clinical trial data surprises can significantly impact stock prices. Positive surprises, such as better-than-expected data or faster time to market, can cause stocks to surge, while negative surprises can have the opposite effect.
• Company-Specific Risks: Each healthcare company has unique risks and growth prospects. For instance, investing in drug companies requires understanding their research and development (R&D) spending, "hit ratio" for new compound discovery, and the potential impact of losing a patent.
• Time Commitment: Investing in healthcare stocks demands active monitoring due to the dynamic nature of the industry. Investors need to stay informed about clinical trial outcomes, aftermarket data, government regulations, and other factors influencing stock prices.
• Concentrated Risk: Investing in individual stocks concentrates risk. If a particular company underperforms or faces setbacks, it can significantly impact the overall portfolio.

Healthcare Mutual Funds and ETFs

Healthcare mutual funds and ETFs offer a more diversified approach to investing in the healthcare sector. Here are some advantages:

• Diversification: These investment vehicles provide exposure to a basket of healthcare stocks or industries, reducing the risk associated with individual stocks. Diversification helps spread risk and potentially leads to more consistent returns.
• Professional Management: Mutual funds and ETFs are managed by investment professionals who carefully select and monitor the holdings. This relieves individual investors from the burden of continuously researching and analyzing stocks.
• Simplicity and Low Cost: Investing in mutual funds and ETFs is generally simpler and more cost-effective than building a diverse portfolio of individual stocks. These funds offer instant diversification at a lower cost, making them attractive to investors seeking a straightforward and affordable way to gain exposure to the healthcare sector.
• Risk Mitigation: The diversified nature of mutual funds and ETFs helps mitigate the impact of individual stock volatility. While the returns may be more modest compared to investing in a single high-performing stock, the risk is also reduced.
• Sector Exposure: Healthcare mutual funds and ETFs provide access to a range of healthcare industries, allowing investors to benefit from the defensive nature of the sector. The healthcare sector is known for its resilience, as people's healthcare spending tends to remain relatively consistent even during economic downturns.

In conclusion, investing in healthcare stocks offers the potential for higher returns but demands meticulous research and active involvement. On the other hand, healthcare mutual funds and ETFs provide a more passive, diversified, and risk-mitigated approach to investing in the healthcare sector. The choice depends on the investor's risk tolerance, time commitment, and preference for active versus passive investment strategies.

The pros and cons of investing in healthcare stocks

Pros

Healthcare stocks can be a good investment, especially if you're looking for a more defensive play in an uncertain economy. Here are some of the advantages of investing in healthcare stocks:

• Recession-resistant: The healthcare sector tends to be more resilient during economic downturns as people don't typically reduce their healthcare spending, even when the economy slumps.
• Steady returns: Healthcare is considered a defensive industry with consistent returns that are generally uncorrelated with the overall stock market. This means that healthcare stocks can provide diversification to an investment portfolio.
• Strong performance: The healthcare sector has historically generated strong performance from May to October when compared to the broader market.
• Growing sector: The healthcare sector is growing faster than the rest of the economy due to several factors, including an aging population, advances in treatment for chronic diseases, and technological advancements in telehealth and remote monitoring.
• Generous returns: Investing in healthcare stocks can provide generous returns, but it requires a multifaceted approach to understanding the underlying capital requirements and drivers.

Cons

While there are benefits to investing in healthcare stocks, there are also some risks to consider:

• Political and regulatory risks: Healthcare is heavily regulated, and changes in government policies or failure to obtain regulatory approvals can significantly impact healthcare companies. For example, the implementation of a single-payer system could have negative implications for the sector.
• Rising costs: The rising costs of healthcare are a significant concern, and there are increasing calls for government action to address this issue.
• Competition and disruption: Established healthcare companies face the constant threat of disruption by new players, including tech companies entering the healthcare sector and nimble biotech startups.
• Reimbursement approvals: Companies that make drugs and medical devices are dependent on reimbursement approvals from health insurers and government agencies to sustain their growth.
• Time-consuming and tedious: Investing in healthcare stocks requires active monitoring and a good understanding of the industry, including clinical trial data, government regulations, and company-specific dynamics.

How to buy healthcare stocks

Healthcare stocks are shares of publicly traded companies that offer products and services in the medical industry. They include hospitals and other medical properties, biotechnology companies, medical equipment manufacturers, and insurance companies.

The first step to investing in healthcare stocks is to open a brokerage account. Then, you need to decide how you want to invest. You could buy individual stocks or funds.

Individual healthcare stocks

It might be tempting to invest in specific healthcare stocks, especially as many of the top-performing stocks have done well in recent years. However, betting too much on an individual stock can be risky, and buying several individual stocks can be expensive. Individual stock pickers also need to research stocks before buying, which can be time-consuming.

Healthcare stock ETFs

An alternative way to gain exposure to several healthcare stocks is through an exchange-traded fund (ETF). Dozens of these are available, some focusing on specific industries within healthcare, such as medical devices, and others covering the entire sector.

Options and healthcare stocks

Healthcare stocks often pay dividends, and advanced investors may be able to generate income by selling options. This could mean selling put options on healthcare stocks they want to buy or selling covered calls on stocks they already own.

Pros and cons of investing in healthcare stocks

Many healthcare stocks offer investors stability and profitability in both good times and bad. But the sector is not without its risks, particularly when the government is involved.

Pros

• Recession resistance: No sector is fully recession-proof, but healthcare holds up better than most during economic downturns.
• Dividends: Healthcare providers, insurers, and established biotech, pharmaceutical, and medical equipment companies often have substantial cash flows from which they can pay dividends.

Cons

• Political risk: About 8% of Americans lacked health insurance in 2022, and more than 40% were underinsured. Universal healthcare has been a major topic of discussion in recent elections, and some proposed reforms could reshape the sector in a way that might hurt investors.
• Regulatory risk: Even in today's privatized U.S. healthcare system, regulatory actions can make or break a healthcare company. Failure to win FDA approval can doom an experimental biotech company, and many hospitals depend on funding from Medicare and Medicaid.

Due diligence

When considering a new investment, in healthcare stocks or any other market sector, always do your due diligence first. While the large-cap stocks listed above can be very safe bets, more volatile small-cap biotech stocks can be incredibly risky. Instead, consider purchasing exchange-traded funds (ETFs) or index funds that track diversified indexes focused on the healthcare sector. These are less swayed by the individual ups and downs of any one company but provide solid, steady long-term growth, which is why financial advisors recommend them for most people.

The different types of healthcare stocks

The healthcare sector is vast and diverse, and there are several different types of healthcare stocks to consider when investing. Here are the four main types:

• Drug Stocks: Drugmakers focus on developing drugs to treat or prevent diseases. This category includes both pharmaceutical companies that use chemicals and biotech firms that use live organisms such as bacteria or enzymes to create drugs. Drug stocks range from large corporations with billions in annual sales to small biotech startups with no products on the market. Examples include Eli Lilly & Co., Merck & Co. Inc., and Vertex Pharmaceuticals.
• Medical Device Stocks: Medical device companies produce devices and equipment used in patient care, ranging from disposable items like gloves and thermometers to advanced technologies like artificial heart valves and robotic surgical systems. Many health tech and medical equipment stocks fall into this category. Examples include Intuitive Surgical, Medtronic, and Thermo-Fisher Scientific Inc.
• Payer Stocks: Payers include health insurers and pharmacy benefit managers (PBMs) that play a crucial role in the healthcare system, especially in the US. Insurers charge premiums to individuals and employers, while PBMs manage prescription drug benefits. UnitedHealth Group is a prominent example of a payer stock.
• Healthcare Provider Stocks: Healthcare providers are on the front lines, delivering healthcare services directly to patients. They include hospitals, physician practices, home health companies, and long-term care facilities. Examples include Abbott Laboratories, Stryker, and Teladoc Health.

Each type of healthcare stock has its own unique dynamics, growth prospects, and risks. When investing in the healthcare sector, it is essential to assess these factors and consider diversifying your portfolio to manage risk effectively.

The risks of investing in healthcare stocks

Investing in healthcare stocks can be a stable and profitable endeavour, but it is not without its risks. Here are some of the risks of investing in healthcare stocks:

Political and Regulatory Risk

The healthcare sector is heavily influenced by government policies and regulations. Changes in government can impact the performance of healthcare stocks, as different parties may have different approaches to healthcare. For example, the Democratic Party in the US is perceived to be more favourable towards healthcare companies than the Republican Party. Additionally, regulatory actions such as FDA approvals can make or break a healthcare company, particularly in the biotech, pharmaceutical, and medical device industries.

Uninsured and Underinsured Populations

In 2022, about 8% of Americans lacked health insurance, and more than 40% were underinsured, meaning they struggled to afford healthcare even with insurance or had gaps in coverage. This presents a risk to investors as it indicates a potential decrease in demand for healthcare services and products. Universal healthcare reforms have been a topic of discussion in recent elections, and while such reforms could increase access to healthcare, they may also reshape the industry in ways that could hurt investors.

High Costs and Reimbursement Issues

The healthcare sector is facing challenges with rising costs that have not been adequately controlled. This can impact the profitability of healthcare companies and may deter potential investors. Additionally, issues with reimbursement, such as the decline in reimbursement rates from insurers, can further affect the financial stability of healthcare providers.

Clinical Trial Outcomes

The biotechnology and pharmaceutical industries are heavily influenced by clinical trial outcomes. Positive surprises, such as better-than-expected clinical data or faster time to market, can cause stocks to appreciate significantly. On the other hand, negative surprises or failures to meet clinical endpoints can lead to a decline in stock prices. This makes the industry highly volatile and risky for investors.

Competition and Customer Choices

The healthcare sector is highly competitive, with customers increasingly shopping around for the best options. This competition can drive down prices and affect the profitability of companies, especially in the pharmaceutical industry, where generic versions of drugs can eat into the market share of brand-name drugs.

Management and Financial Stability

It is crucial to invest in healthcare companies with conservative and trustworthy management. Timing mismatches between the consumption of medical services and the payment of bills can occur, and proper financial management is essential to mitigate these issues. Additionally, investors should consider the financial stability and liability reserves of potential investments.

Frequently asked questions