| Healthcare Supplies & Services |
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 instantaneously.
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.
|
Major Players in the Industry |
|
CR Bard (BCR) |
|
Hillenbrand (HB) |
|
Dentsply (XRAY) |
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.
