Biotech and pharmaceutical firms, as well as insurance firms and pharmacies, are all part of the highly diverse healthcare industry.
Everyone requires healthcare at some point. And when there is something that everyone requires, there is a big potential for investors.
Over $8.1 trillion is spent on healthcare on a global level. Almost half of the amount, or nearly $3.5 trillion, is spent in the United States. These figures will very probably be substantially higher by the end of the decade, given the healthcare industry is growing far faster than the broader global economy.
How may investors benefit from this expansion? What you need to know about investing in healthcare stocks is outlined below.
Various sorts of healthcare stocks
- Drug stocks: Pharmaceutical companies concentrate on creating medications to treat ailments. Biotechs create medications using living creatures such as bacteria or enzymes, whereas pharmaceutical firms utilize chemicals. Drug stocks range from massive corporations with billions of dollars in annual sales to small biotechs with no medicines on the market.
- Medical device stocks: Medical device businesses manufacture equipment used in patient care. These devices range in complexity from the simple, such as disposable gloves and thermometers, to the extremely sophisticated, such as artificial heart valves and robotic surgical systems.
- Payer stocks: Payers, which include health insurers and pharmacy benefit managers (PBMs), play a critical role in the United States’ healthcare system. Individuals and companies pay premiums to insurers to cover healthcare expenses, while PBMs manage prescription medication coverage for employers and health plans.
- Stocks in healthcare providers: Healthcare providers are on the front lines of serving people with healthcare services. Among these are hospitals, medical practices, home health care companies, and long-term care (LTC) institutions.
Top healthcare stocks
- Vertex Pharmaceuticals (NASDAQ:VRTX) is one of the market’s top biotech stocks. The company’s primary emphasis is on finding medicines to address the underlying cause of cystic fibrosis (CF), a rare hereditary illness that causes lung and other organ damage. Trikafta, Vertex’s newest CF medication, has the potential to increase the number of patients that its therapies can cure by more than half. The firm is also working on medicines to treat other rare genetic disorders, as well as more prevalent ailments such as type 1 diabetes.
- Intuitive Surgical (NASDAQ:ISRG) is a fantastic example of a medical device stock that is a robotic surgical system. Since its debut in 1999, the company’s da Vinci robotic surgical system has been utilized in over 7.2 million surgeries. The COVID-19 epidemic harmed the company’s bottom line by delaying elective operations. The availability of vaccinations, on the other hand, should help bring the epidemic to a conclusion and return Intuitive’s business to its prior levels of growth. Over time, the firm should see significant growth as more elderly people require the sorts of surgical procedures for which da Vinci is commonly employed.
- UnitedHealth Group (NYSE:UNH) is the world’s largest health insurer. UnitedHealth Group is one of the most appealing payer companies on the market due to its size, reliability, and dividend.
- Teladoc Health (NYSE:TDOC) is widely regarded as one of the top healthcare provider companies. The firm offers telehealth services, which include delivering healthcare remotely via the internet and phone. Teladoc’s 2020 acquisition of Livongo Health provided the firm with a digital health platform for assisting people in managing chronic diseases such as diabetes.The COVID-19 epidemic has prompted a surge in the use of virtual care services. Even when the epidemic is over, Teladoc’s development prospects should be quite promising. Individuals, businesses, governments, and health insurance all want to keep healthcare expenses under control, which telemedicine and chronic illness management may assist with.
What to consider when investing in healthcare stocks
How would you find the best healthcare stocks to buy? Should consider the following 4 key factors.
1.Prospects for expansion
The most crucial factor to consider when selecting a healthcare stock is the company’s growth prospects. Determine the rate at which revenue has increased in recent years. The future may not necessarily reflect the past, but if a firm has not been able to achieve high revenue growth in the past, it is unlikely to do so in the future.
Deal-making, on the other hand, does not always imply the outright purchase of another firm. Instead of purchasing smaller players, larger corporations will occasionally partner with them. Vertex Pharmaceuticals, for example, collaborated with the tiny company CRISPR Therapeutics (NASDAQ: CRSP) to develop CTX001, a gene-editing treatment, to treat two uncommon blood diseases, beta-thalassemia and sickle cell disease.
2. Financial strength
Regulatory filings to the SEC also include financial information that may be used to assess a company’s financial soundness. Ideally, a firm will be profitable from the start. If it isn’t, find out how it intends to reach profitability and when it expects to do so.
The cash position of a corporation, which includes cash, cash equivalents, and short-term investments, may be seen in its annual and quarterly regulatory filings on the balance sheet (a financial statement that details all of the firm’s assets, liabilities, and shareholder ownership). Consider your cash situation, in the same manner, you would consider the amount of money in your checking, savings, and retirement accounts.
3. Valuation
Before purchasing a new automobile, you’d want to know how much it’s worth. Before purchasing a healthcare stock, you should determine its valuation to ensure that you are paying a reasonable price.
There are a variety of value indicators available here. The most common is the price-to-earnings (P/E) ratio, which compares a stock’s price to its earnings per share (what you get in earnings for every dollar you invest).
4. Dividends
Some healthcare stocks pay dividends, which are a part of earnings returned to shareholders. Dividends can increase the overall return on your investment.
The dividend yield indicates the size of a stock’s yearly dividend payments as a proportion of its current share price. Consider the payout ratio of the stock, which measures dividends as a proportion of profits and reveals how much of the company’s cash is utilized to fund the dividend. The lower the payout ratio, the more likely the firm will be able to continue paying dividends in the future.
What are the risks inherent in healthcare stocks?
Investing in any type of stock carries risks, including the chance that competitors will produce more profitable products and services in the market. These risks, as well as others more particular to the industry, are faced by healthcare equities.
The healthcare industry is heavily regulated. Drugmakers and medical device manufacturers may fail to obtain the necessary regulatory clearances to sell new goods, and regulatory changes may significantly affect the growth prospects of a healthcare business. The Food and Drug Administration (FDA) regulates medicines and medical devices in the United States.
Many healthcare stocks are also vulnerable to lawsuits. Biopharmaceutical firms, medical device manufacturers, and healthcare professionals, for example, might be sued if patients believe their goods or services harmed them.
Many healthcare organizations are likewise heavily reliant on Medicare reimbursement levels. The Biden administration has proposed reforms to Medicare that would allow the government to negotiate medication pricing with manufacturers. If these adjustments are implemented, drugmakers’ revenues and profits may suffer as Medicare pays less for certain medications.
Healthcare stocks should do well.
Despite these dangers, the long-term picture for healthcare stocks looks to be quite positive. Global aging demographic trends, combined with technological improvements, could create huge possibilities for healthcare companies – and deliver excellent returns for patient investors.
