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A Different Way to Profit From the Healthcare Industry

By Paul Tracy
Editor, StreetAuthority Market Advisor
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Published:  November 21, 2006

When it comes to investing in the healthcare industry, most investors think first of pharmaceutical and biotech stocks. Although these firms play an important role, good health and modern medicine involves a lot more than simply taking a few pills each day or getting a vaccine injection once a year. Modern healthcare is a complex business involving an array of high-tech equipment, specialized supplies, and a highly skilled workforce.

Think back to the last time you visited your dentist. If you're like most patients, then your dentist used a powerful light along with a series of handheld mirrors and probes to examine your teeth. He or she likely also used specialized dustless latex gloves and an X-ray machine during your examination. And if you were unlucky enough to need a filling, then that procedure involved several different types of pastes, sealants, and compounds.

And, of course, it's not just dentists -- every doctor's office and hospital in the country is equipped with a wide variety of medical appliances and uses a steady stream of disposable products. While none of these products are as glamorous as the next breakthrough cancer drug, they're just as crucial to proper healthcare.

And supplies and equipment aren't all that's involved in healthcare. Before you even see your doctor or dentist, a nurse likely pulls your detailed patient records. When you consider the hundreds of patients at a typical medical practice, that's a lot of information to keep track of and update. Today, powerful computer databases are used to manage and sort all of this information; computerized databases can even allow a doctor in a distant city you're visiting to view your medical records almost instantly.

Whether it's disposable latex gloves or advanced patient database software, a handful of companies supply hospitals, dentists, and doctors with the equipment and supplies they need to perform their work effectively. Medical services and supply companies also benefit from consistent, growing demand. Even in relatively severe economic slowdowns consumers will keep paying hefty sums for healthcare.

Moreover, the industry benefits from solid demographics and growth dynamics. As our chart shows, healthcare spending by Americans over 65 years old has been steadily increasing since the mid-1990s. Furthermore, older Americans spend far more on healthcare than their younger counterparts. As our second chart shows, the U.S. Census Bureau projects the number of Americans over 65 will increase from 35 million in 2000 to nearly 90 million by 2050. That spells increased spending on healthcare for years to come, regardless of how fast the economy is growing.

Even better, medical services and supply firms enjoy one major advantage over pharmaceutical and biotech firms -- lower business risks. Specifically, developing a new drug is an expensive and time-consuming process. Out of thousands of compounds studied, a company may find just a handful with the potential to become new drugs. And those compounds must be put through a series of clinical trials to establish safety and efficacy before receiving approval from the FDA. On average, less than 20% of all drugs entering clinical trials ultimately make it to the market. It also takes an average of nearly 14 years to develop a new drug and push it through clinical trials. As a result, new drug development can cost hundreds of millions -- and in some cases even billions -- of dollars.

And pharmaceutical companies remain at risk even after a drug is developed, approved, and launched. Merck's Vioxx drug, for example, was found to have negative side effects in some patients long after the drug was launched. Vioxx was taken off the market as a result, and now Merck faces the loss of Vioxx sales and the specter of years of expensive lawsuits and punitive damage awards.

By contrast, the medical services and supplies industry is a relatively simple business. When it comes to medical products like X-rays and lamps, there is little or no development risk or cost. And with most of these products there's far less risk of expensive lawsuits.

With these points in mind, my staff and I highlight three of our favorite companies in the medical supplies and services business . . .

Important Note:  Throughout the remainder of this article, editor Paul Tracy provides a detailed look at three companies that specialize in the medical supplies and services industry. However, in order to view the remainder of this article, you'll need to subscribe to our premium newsletter -- Market Advisor. After you subscribe you'll receive immediate access to this full article, as well as our monthly Market Advisor newsletter and a host of additional premium content. Please visit one of the following links to continue...

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Good investing!

-- Paul Tracy
StreetAuthority Market Advisor

To receive in-depth guidance on today's leading investing opportunities each month, plus access to five model portfolios, please subscribe to Paul Tracy's premium investment newsletter -- the StreetAuthority Market Advisor.

Paul Tracy founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators.

Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S.

Paul graduated with a B.S. in Finance and Management from the McIntire School of Commerce at the University of Virginia.

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