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Global Health Care Sector Investment Universe 保健行业投资思考及股票选择

The Health Care sector has many diverse industries; it can be broadly split into two groups:

  1. Pharmaceuticals, Biotechnology & Life Sciences. The group includes firms in the discovery, development, manufacturing, and distribution of prescription drugs; it also includes firms supporting the drug discovery process, as well as those that serve firms outside the health care business by testing the quality of food, water, air, and metals.
  2. Health Care Equipment & Services. The group includes medical equipment makers, health insurance firms, pharmacy benefit managers, hospitals, and technology firms.

Health Care TableHealth Care Characteristics

  • The sector is less economically sensitive and less volatile than the broad market, i.e. “elasticity” and low beta.
  • It deals with heavy government involvement, thus understanding the role of government and potential policy changes is vital.
  • It has a large, global market – everyone everywhere consumes some amount of health care.
  • It is mostly characterized by big cap, growth companies – growth companies in nature, due to innovation, favorable demographics, and inelastic demand help drive profits and valuations.
  • It is dominated by U.S. firms, largely because it’s the world’s largest market and known to have the most innovative health care sources.
  • Health care expenses are shared between the government, insurance firms, and individuals; the private industry, i.e., insurance companies and individuals, pays for more than half of all health costs.

Demand Drivers of the Health Care Sector

  • Imperfect information. Health care is usually paid for or subsidized by a third party, it feels cheap or even free, even when it’s not, which can lead to almost unlimited demand.
  • Asymmetric information. Due to lack of transparency, health care is unique in that providers have far more knowledge than their customers about products and pricing.
  • Preventable diseases are large drivers of health costs.
  • Defensive medicine. Doctors are frequent targets of litigation, even very good doctors. To avoid excessive lawsuits, doctors resort to excessive tests or procedures, which can be costly.
  • External demand for the U.S. The U.S. private Health Care market subsidizes the rest of world; governments force private firms to accept price caps, so the private sector must overcharge U.S. patients where a freer market exists in order to recoup slimmer margins or suffer outright losses from selling into nations with price caps.

Health Care Systems by Major Countries

  • Japan mandates universal health care coverage for all residents, mostly through employer-provided insurance plans. Public insurance funding comes from an approximately 8 percent payroll tax. The government determines a standardized reimbursement schedule on a fee-for-service basis.
  • Germany operates Europe’s oldest universal health care system in which virtually every is required to have health insurance. Germany’s health care system is not government run and operated, though it is heavily government subsidized. Germans receive coverage either via “sickness funds” or “private insurance.”
  • France also has a universal health care system. The World Health Organization (WHO) ranks it the No.1 health care system in the world, however, budget deficits are a major concern, which limits advancements in capital technology, increases co-pays, and reduces reimbursement coverage and rates. Coverage and reimbursement rates for hospitals and private practice doctors are negotiated between the insurance funds and unions representing the health care community.
  • UK’s government is the primary payer, with little cost sharing. UK health care challenges include tight budgets and focus on cost control, which lead to longer waiting times and rationed health care. The government establishes a national health care budget, carried out by the National Health Service (NHS). UK offers coverage to all legal residents, unlike France and Germany, where primarily based on work status.
  • Each country in the EU determines its own health care budget and reimbursement guidelines, however, the European Medicines Agency (EMA) is the regulatory body that evaluates and approves new medicine applications, and monitors the safety profiles of existing drugs for all countries within the EU, Iceland, Liechtenstein, and Norway.
  • China, as an emerging market, has a health care system unlike any of the developed countries. Chinese residents typically save a large portion of their income because in part the medical expenses are high and most either have no insurance or are vastly underinsured.

Drug Patents, Lifecycle, and Development Process

  • Major types of drug patents are composition of matter, process, use, and delivery method. Research and development (R&D) is the lifeblood of the drug industry. Drug firms must launch new drugs on a regular basis because each drug’s revenue and profit, particularly for pharmaceuticals, is limited by the length of time remaining on its patent.
  • Biotech is unique in that the U.S. does not currently allow biogenerics or bioequivalent. They are prohibited because it’s more difficult to develop and manufacture biotech drugs, since biotech drugs are made from living organisms. It is suggested biogenerics also go through clinical trials.
  • The testing phase can take years and can cost 1$ billion or more. Regulatory groups, like the Food and Drug Administration (FDA) and the European Medicines Agency (EMA), require a drug to pass three clinical phases of human testing before it can be approved; however, preclinical studies are conducted in test tubes and animals for efficacy and toxicity.
  • Generics are produced and sold without patent protection. Generic firms cannot charge premium pricing and they must compete based on manufacturing and economies of scale. Many generic companies are domiciled in emerging markets where costs can be lower.

Health Care Services

Health Care Services firms include pharmacy benefit managers, laboratory testing services, dialysis centers, contract research organizations. Pharmacy benefit managers are influenced by drivers similar to distributors, volume and demand for generic drugs, but developing a network is vitally important as well.

Investors use the Days Claims Payable (DCP) ratio to assess earnings quality, which tells how many days it would take to pay all outstanding medical claims.

Challenges in the Health Care Sector

  • Patent expirations
  • Competition from innovators and generic manufacturers
  • Pricing pressure
  • Weak pipelines

Solutions to Challenges

  • Pipeline development and tactical pricing – in order to keep pipelines full to offset patent expirations, R&D budget growth typically remains relatively steady despite pressured sales
  • Mergers and acquisitions – firms can acquire competitors to offset patent expirations, realize cost efficiencies, and grow operations
  • Restructuring – restructuring operations and improving efficiency is another method of combating slowing growth
  • Lobbying – government is heavily involved in health care, it’s imperative the Health Care industry be involved to help shape and guide reform measures


Fisher Investments on Health Care 2012


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