A Beginner’s Guide to Investing in Healthcare Stocks

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The healthcare sector consists of many different industries that make, sell, and distribute products and services for the medical field. With medicine and healthcare being so necessary for us as humans, it is no wonder that investors seeking to find reliable investments often choose to invest in the companies that provide those necessary services and products.  

Keep reading for the Kinvestor Network’s beginner guide to the types of healthcare stocks, what to consider when investing in healthcare, and a few of the current hot companies in the healthcare sector. 

Types of Healthcare Stocks

1. Drug manufacturers

Drug manufacturers, which can be further divided into pharmaceutical and biotech companies, create drugs or treatments for various diseases, viruses, or conditions. Prospective investors seeking healthcare investment opportunities must have some understanding of the ins and outs of what each company does, including what the drug being made is intended to treat, how many people are affected by the disease or condition targeted by the drug, where the company stands in terms of regulatory approvals and clinical trials required by government agencies like the Food and Drug Administration (FDA), any patents owned by the company or its competitors, and the company’s marketing framework for its product(s). 

Top Drug Manufacturer Stocks:

  • Azenta Inc. (NDAQ:AZTA)
  • Moderna Inc. (NDAQ:MRNA)
  • Vertex Pharmaceuticals Inc. (NDAQ:VRTX)
  • Eli Lilly and Co. (NYSE:LLY)

2. Medical Devices

Medical device companies create the products used to care for patients, including more common medical equipment like syringes, thermometers, and gloves, as well as advanced technological devices like robotic surgical systems, artificial heart valves, and innovative new ways to administer drugs. Like drug manufacturers, medical device companies often focus on research and development (R&D) as part of their business model, and may also need to undergo clinical trials or regulatory approvals for their products. 

Top Medical Device/Technology Stocks:

  • Embecta Corp. (NDAQ:EMBC)
  • Abiomed Inc. (NDAQ:ABMD)
  • Helius Medical Technologies (TSX:HSM)

3. Payers

One of the questions investors must ask when considering investing in the healthcare sector is, “Who pays the bills?” Healthcare does not come without a cost; medicines and technologies cost money to develop, and healthcare providers, researchers, and support staff need to be paid. Payers, including health insurers and pharmacy benefit managers (PBMs), play an especially important role in the U.S. healthcare system. Insurers charge premiums to individuals and employers to pay for healthcare costs, while PBMs administer prescription drug benefits for employers and health plans.

Top Payer/Insurance Stocks:

  • Manulife (TSX:MFC)
  • Sun Life Financial (TSX:SLF) 
  • Intact Financial (TSX:IFC)

4. Healthcare providers/facilities

Healthcare providers stand at the front lines delivering healthcare services to patients. They include hospitals, physician practices, home health companies, and long-term care facilities. Controlling costs among numerous cost centers is very difficult for hospitals. The ones that do this well and incorporate computer systems tend to be considered the best managed. In addition, hospitals that are able to recruit specialist physicians, such as neonatologists, are able to increase EBITDA per bed as specialty medical practice generally garners higher payments for services. Other than bad-debt ratios, EBITDA per bed and overall utilization or capacity rates are other important metrics.

Top Healthcare Facility Stocks:

  • Encompass Health Corporation (NYSE:EHC)
  • HCA Healthcare (NYSE:HCA)
  • Select Medical Holdings (NYSE:SEM)

5. Distributors

Distributors are intermediaries between the drug manufacturers and the pharmacies, and receive a service fee for controlling the logistics for the pharmaceutical companies. Many distributors also have other lines of business that improve margins, such as packaging some of the drugs, but the service-fee margin is a main driver of profits. 

Top Distributor Stocks:

  • McKesson Corp. (NYSE:MCK)
  • Patterson Companies Inc. (NDAQ:PDCO)
  • Henry Schein Inc. (NDAQ:HSIC)

Things to consider when investing in healthcare

There are several advantages to investing in the healthcare sector, but like all investments it is not without its risks. Because people will always need healthcare, the industry offers steady returns, and is future-proofed for growth with the development of new technology, the aging population, and improving treatments for chronic diseases. 

Like all prospective investments, investors need to do research into the growth trends of each industry and the prospects for future growth, into the financial position of the company, its valuation and dividends, and into any competitors offering similar products or services to the market. 

Some risks associated with healthcare stocks include the rising cost of healthcare, strict regulatory approvals needed to take products to market, and the large number of competitors in emerging market sectors like medical technology and pharmaceutical development. 

So why should investors consider adding healthcare stocks to their portfolios? According to a recent report from The Business Research Company, the global healthcare services market is expected to grow from $6.87 trillion in 2021 to $7.55 trillion in 2022 at a compound annual growth rate (CAGR) of 9.8%. By 2026, the market is expected to reach $10.41 trillion at a CAGR of 8.4%. Despite the healthcare industry’s small market size, it is one of the most lucrative globally. Heightened interest in the sector since the pandemic began, higher quality general healthcare, and rising life expectancy are likely to boost spending and healthcare industry growth in the coming years. 

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Sources

https://www.fool.com/investing/stock-market/market-sectors/healthcare/

https://www.investopedia.com/articles/stocks/08/investing-in-healthcare.asp

https://www.investopedia.com/investing/top-healthcare-stocks/

https://www.investopedia.com/investing/pharmaceutical-stocks/

https://www.reportlinker.com/p06229152/Healthcare-Services-Global-Market-Report