Opportunities for Investment in Health Care

Investing in health care can be challenging and rewarding for the astute investor.

While there remains a broad scope of speculative plays on future drug and biotech breakthroughs, I will emphasise in this article an approach to investment based on building healthcare as one of the strong pillars of a well diversified portfolio. The easiest way to gain exposure to health care is through equity investment.

Although no one knows the near-term movement of the equity markets, long term market movement will be positive. The simple truth is that ever-increasing capital finds its way into equity investment in corporations. Well-run, growth oriented companies that produce and drive the global economic engines are rewarded with more investment. Investing is a form of voting with your (excess) capital. It is best to identify and vote on winners, whatever the sector or investment may be.

Before discussing investment ideas in certain sectors, let me state that large-cap health care stalwarts such as Johnson & Johnson (JNJ), Pfizer (PFE) and Abbott (ABT) are great ways to park your capital, collect dividends (especially in tax-advantaged accounts) and even pursue safe growth of capital through a stable monthly covered call option writing technique. For older investors, or investors with a shorter timeline, this may be a better way to have financial exposure to the health care industry.

As a physician I see global health care being refined and optimised in the future. Medical informatics and information technologies will have a greater role in health care delivery of the future.

Currently, there is too much waste in medicine, too many redundant studies. As medical spending is tightened in the coming years, IT will help trim the fat. Medical information must be safe, easily obtained from the internet, and easily updated by medical practitioners. There are many companies working on this important advancement, and the technology already exists.

Capital will also be pumped into this exciting field. In fact, the US government is dedicating $50 billion over the next 5 years for this sector. Exposure to this field can be obtained through individual stocks or an ETF. I will present some ideas and starting points for investment research in the following discussion.

For electronic transmission, storage, and processing of prescriptions Misys Healthcare Solutions (MDRX) is worth a look. Although it currently has a high P/E ratio, earnings are strong and its product is useful and needed. Electronic storage and systems for administrative functions of healthcare facilities and medical records is also critically important and Cerner (CERN) is a company with good fundamentals and leading the pack in its field. Medical transcription services, products, and systems for conversion into electronic medical records are equally important and Transcend Services (TRCR) may win many contracts in the coming years given the need for electronic archiving of health care data.

Although much larger companies have health IT exposure such as Google (GOOG), Philips (PHG), FujiFilm (FUJI), and General Electric (GE), they also have much larger market caps. These stable giants may be good investments for other reasons, but they are unlikely to achieve the growth of the small to mid cap companies.

Another exciting field that will be pivotal in the future cost-control conscious health care market will be the generic medications market. Already, companies such as Medco (MHS) are on the cutting edge of distribution and marketing of generic drugs.

Furthermore, over the next five years, there will be many very important drugs that will lose patent protection and will be brought to market in their generic forms. Mylan (MYL) and competitor Teva (TEVA) are also strong companies in this sector that will likely grow and be very profitable over the coming years; however, these last two have been bought up by investors for this very reason and may be expensive to invest in currently.

Another investment option in the health care sector is in the bio-device and bio-technology arena. One interesting work horse with solid growth is a Chinese company called Mindray Medical (MR). This Shenzhen medical device company estimates 2010 growth to be 17 per cent and based on prior year’s growth and earnings potential, this seems like a very realistic goal. Risks in China are real, and there is a current debate about the Chinese economy representing true growth versus an insidious bubble. In time, with urbanisation and development of China there will be an economic force to be reckoned with; however, there is a very real short term risk in the Chinese market let alone the global market.

As with all investments, it is best to consider costs, taxes, and your ultimate goals. For safe and stable long term growth, the health care industry is a well managed, well established and proven stable sector. Income plays, those that deliver dividends on a regular basis, should also be considered and are best utilised in tax advantaged accounts.

The future of health care will see much change towards optimisation and cost control. Corporations that take advantage of this new era of health frugality will capitalise on increased market share, earnings and growth. The overall goal, of course, is to provide better medical care to all humans everywhere. This will be achieved by optimised corporations that can offer state-of-the-art services and products at value driven costs to the consumer.

As population increases, so do the hordes of the sick and infirm. With the pandemic of tobacco abuse a very real specter on our health care horizon, the health care market has no choice but to grow. Savvy investors have many opportunities to bolster their exposure to health care in these uncertain times.

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