How to invest in healthcare companies [Guide]

Taking care of your health is timeless. There is no need to remind anyone what Adam Mickiewicz compared Lithuania to in his famous work Mr Tadeusz. It is therefore not surprising that in the course of economic development, the healthcare segment has developed in a stunning way. Many companies in this sector have stable revenues, which results from the fact that they sell products necessary for the functioning of many people. This is the case with manufacturers of drugs fighting cancer or heart disease. We also cannot forget about manufacturers of specialized medical devices. The margins achieved by companies operating in this market are often very high because the barriers to market entry are huge. It is not only about the costs of starting work on a new drug or device, but also about patent protection. Thanks to patents, pharmaceutical companies in this industry can earn high profits. When patent protection expires, so-called generic drugs appear like mushrooms after the rain and work in the same way as the current leader. With the entry of competition into the market, the prices and profitability of drug sales decrease.

Of course, the medical services market is much broader, including hospitals, dental laboratories and laboratory activities. According to data published by The Business Research Company, in 2022 the value of the global medical services market was $7 billion and is expected to increase to $500 billion by 2027. So even though the market seems mature, there is still a lot of room for growth. This is due to both the enrichment of developed societies and the dynamic development of medical markets in developing countries.

It is no surprise that the most important medical markets are those belonging to the most developed regions such as North America, European Union, Japan, United Kingdom. Of course, there are other important markets Chinese and Indian. This is due to, among others, from the huge population of these regions and the dynamic growth of these countries over the last few decades (especially China).

It is worth remembering that the health care sector is one of the best performers on the stock exchange. Entering this sector is very difficult. This results not only from capital issues, but also from the need to obtain licenses and permits. Another difficulty is the long time needed to create a new product. The days of one scientist inventing drugs are long gone. You need a team of people (and computer programs) to find potential molecules. Then tests and clinical trials are created. Many of the promising molecules do not pass particular stages of testing. Therefore, inventing new drugs is a highly risky activity. Larger companies have large capital resources that allow for more long-term operations. Large corporations see that most research work will not bring large profits. However, if they find a new drug, thanks to patent protection they can achieve huge revenues that will more than cover previous losses.

Healthcare market – segments

Typically, companies operating in this sector specialize in particular niches. Companies operating on the health market can be divided into:

• pharmaceutical companies;
• medical equipment manufacturers;
• laboratory companies;
• medical insurance providers.

Pharmaceutical companies

This is the first association with the medical market. However, such companies can be divided into drug patent rights holders, generic drug manufacturers and biotechnology companies. Biotechnology companies they research new drugs and treatments. Typically, such entities cooperate with larger players who invest in the research work of specialized entities. Smaller biotech entities have irregular revenues and small research teams. Often, their activities do not create much value for shareholders, but if they manage to develop a promising drug, the rates of return can be staggering. Biotechs include: Alexion, Vertex, Gilead Scienses or Celegene.

The largest pharmaceutical companies have a wide portfolio of drugs that are protected by patents. Thanks to this, such companies generate large amounts of cash, which they spend on additional research, dividend payment and taking over promising, smaller companies. The quotations of this type of companies are usually less volatile. The exception is information correcting forecasts of future profits. Such events include new drugs approved by the FDA and lawsuits from drug users. The largest pharmaceutical companies include: J&J, Roche, Pfizer, Eli Lilly or Astrazeneca.

CHECK: Is it worth investing in Pfizer shares? [Guide]

Smaller companies do not have the resources to conduct their own research. As a result, they focus on the more predictable market that they are generic medicines. Such drugs have the same properties as those recently protected by patents. The market for such drugs is already mature. Companies compete on operational efficiency, which translates into lower prices. As you might guess, these types of products have a low margin.

Medical device manufacturers

Health care also includes tools, cleaning products and gloves that are used during surgery. You also can't forget about diagnostic devices such as magnetic resonance imaging. This type of companies also includes robot manufacturers DaVinci, which are sold all over the world (the distributor in Poland and some CEE countries is listed on the WSE Synektik). Examples of medical equipment companies include: Intuitive Surgical and Medtronic.

Laboratory companies

These are specialized businesses that run laboratory results analysis activity. They analyze blood samples or, for example, body samples. Many companies are listed on the stock exchange, including: Laboratory Corporation of America Holdings.

Health insurers

This is a particularly developed segment in the United States, because the local health service is a mix of private and public, with all its advantages and disadvantages. In the USA there is the so-called Big Five, which deals with, among others, management of the Medicaid program. The Big 5 companies include: UnitedHealth Group Anthem, Aetna, Molina and Cente.

Healthcare building management companies

As with health insurers, this also applies mainly to the United States. Such companies deal management of hospitals, clinics and laboratories. A great example of such a company is HCA Healthcare Inc., which manages a network of hospitals in the USA and Great Britain.

How to invest in healthcare companies?

The most popular investment methods in this sector include:

• own selection of joint-stock companies,
• acquisition of an ETF.

Buying companies on your own involves investing a lot of time to choose the most promising shares. Another disadvantage of such a strategy is the need to properly assess the company's potential and proper valuation. Even the best company may not be a good investment if you paid more for it than it is worth. The advantage of such a strategy is that with a good selection of companies, you can achieve a much higher rate of return than the benchmark.

The second way is to buy a "basket" of companies that represent a given sector. Thanks to this, the investor does not have to worry about which company to choose, he just adds future winners and losers to his portfolio. The disadvantage of this solution is that you will never beat a given benchmark. This is due to management costs, which reduce investment profits.

The most popular ETFs with exposure to the health sector

There are many ETFs, which provide exposure to the healthcare market, technology companies operating in the medical industry. In addition, ETFs often have biotechnology companies producing medical devices or pharmaceuticals. European investors have limited access to the ETF market. For this reason, we will focus on the most popular funds available to investors in Europe.

iShares S&P 500 Health Care Sector UCITS ETF (Acc)

This is an ETF that gives exposure to US healthcare companies. The benchmark for the fund is the S&P 500 Capped 35/20 Health Care index. I will limit the weight of all companies to 20% of the mentioned index. In turn, the largest company cannot have more than 35% weight. The mentioned ETF has €1,8 billion of assets under management. The annual cost of maintaining the fund is 0,15%. The mentioned ETF currently has 64 companies in its portfolio. The fund's 10 largest components include:

• UnitedHealth Group – 9,6%
• Eli Lilly – 9,2%
• Johnson & Johnson – 7,5%
• Merck – 5,5%
• Abbvie – 5,4%
• Thermo Fisher – 4,1%
• Abbott Laboratories – 3,8%
• Pfizer – 3,2%
• Amgen – 3,0%
• Danaher – 3,0%

Xtrackers MSCI World Health Care UCITS ETF 1C

The benchmark for this index is MSCI World Health Care, which aggregates health care companies. The fund has approximately €1,7 billion of assets under management. The annual maintenance cost of the fund (TER) was 0,25%. The ETF is very diversified as the portfolio includes 138 companies. The 10 largest positions in the ETF are:

• UnitedHealth Group – 6,7%
• Eli Lilly – 6,4%
• Johnson & Johnson – 5,2%
• Novo Nordisk – 4,7%
• Merck – 3,8%
• Abbvie – 3,7%
• Astrazeneca – 2,9%
• Novartis – 2,8%
• Thermo Fisher – 2,8%
• Roche – 2,8%

You can see that the mentioned index has a slightly different composition from iShares. There are many European companies that are among the largest in their industry. These include Novo – Nordisk, Astrazeneca and Roche. An ETF may be a good idea for people looking for the largest companies around the world that operate in the healthcare industry.

iShares Healthcare Innovation UCITS ETF

This is a completely different ETF, compared to the previous two. The mentioned product invests in innovative companies that want to change the healthcare services market. The benchmark for the index is the STOXX Global Breakthrough Healthcare Index. The mentioned ETF currently has €940 million in assets under management. The annual cost of managing the fund is 0,40%.

• Neurocrine Biosciences – 1,8%
• Amgen – 1,7%
• Karuna – 1,7%
• Celltrion INC – 1,6%
• Agilent Technologies – 1,6%
• Charles River Laboratories – 1,5%
• Boston Scientific – 1,5%
• ABBVIE INC – 1,5%
• IQVIA – 1,5%
• Repligen – 1,5%

This is a product for people who are interested in investing in smaller companies that focus on the technological side of medical development. For this reason, we will not find the largest pharmaceutical companies among the largest items. However, it is worth remembering that when investing in a portfolio of such companies, there is a greater investment risk than acquiring mature pharmaceutical companies with an established market position.

iShares Aging Population UCITS ETF

This is a product that is a good choice for people looking for companies that will profit from the global trend of population aging. The benchmark for the ETF is the iSTOXX® FactSet Aging Population index. The above-mentioned index groups companies that provide products or services intended for people aged 60 or more. Currently, the fund's assets under management amount to approximately €0,6 billion. The total cost of the fund is 0,40% per annum. It is worth taking a closer look at the composition of the portfolio. Interestingly, among the largest companies in the ETF there are non-obvious items, such as: Booking (application for booking accommodation), or UBS-Group (financial institution). In total, the fund includes 338 companies. The 10 largest index components include:

• Cytokinetics – 1,0%
• Immunogen – 0,9%
• UBS – 0,7%
• Expedia – 0,7%
• Neurocrine Biosciences – 0,7%
• Daiwa Securities Group – 0,6%
• Karuna – 0,6%
• Robinhiid Markets – 0,6%
• Booking Holdings – 0,6%
• Swedish Orphan Biovitrum – 0,6%

SPDR MSCI Europe Health Care UCITS ETF

This is a product for investors who are looking for exposure to European healthcare companies. Pharmaceutical companies dominate among the companies in the portfolio. Novo-Nordisk, the manufacturer of the Ozempic drug, has the greatest importance. The benchmark for the ETF is the MSCI Europe Health Care 20/35 Capped index. In the above-mentioned index, the maximum weight of the largest component is limited to 35%, while for other companies it is 20%. The ETF had accumulated approximately €2023 billion of assets under management at the end of 0,8. The mentioned fund is quite cheap, as the annual total cost of funds is 0,18%. The ETF currently has 41 companies in its portfolio, which means the fund is much more concentrated than previous ones.

• Novo-Nordisk – 20,8%
• Astrazeneca – 12,9%
• Novartis – 12,8%
• Roche – 12,6%
• Sanofi – 7,0%
• GSK – 4,7%
• EssilorLuxottica – 3,6%
• Alcon – 2,4%
• Bayer – 2,3%
• Lonza Group – 1,9%

Forex brokers offering ETFs and stocks

How to invest in healthcare companies? There is no best method here - we have to decide whether we want to invest our time in searching for opportunities and more promising individual companies, hoping that we will be able to beat the benchmark, or whether we want to focus on broad diversification. Purchasing the entire basket of shares on your own or through an ETF is a safer solution, but also limits the potential for large profits. In the case of the health sector, we have quite a large list of the previously mentioned funds to choose from.

An increasing number of forex brokers have quite a rich offer of stocks, ETFs and CFDs for these instruments.

For example on XTB Today, we can find over 3500 equity instruments and 400 ETFs, a Saxo Bank over 19 companies and 000 ETF funds.

Broker
End	Poland	Denmark	Cyprus
Number of exchanges on offer	16 exchanges	37 exchanges	21 exchanges
Number of shares in the offer	approx. 3500 - shares circa 2000 - CFDs on shares	19 - shares 8 - CFDs on shares	3 - shares
The amount of ETF on offer	approx. 400 - ETF approx. 170 - CFD on ETF	3000 - ETF 675 - CFD on ETF	323 - ETF
Commission	0% commission up to EUR 100 turnover / month	according to the price list	0% commission*
Min. Deposit	PLN 0 (recommended min. PLN 2000 or USD 500, EUR)	PLN 0 / EUR 0 / USD 0	100 USD
Platform	xStation	SaxoTrader Pro Saxo Trader Go	EToro platform
	REVIEW	REVIEW	REVIEW
	CREATE AN ACCOUNT	CREATE AN ACCOUNT	CREATE AN ACCOUNT

*Zero commission means no brokerage/transaction fee was charged during the activity. However, they may still incur general fees, such as currency conversion fees for deposits and effects in non-USD currencies, fees for fees, and (if applicable) inactivity fees. Market spread also applies, although this is not a "fee" charged by eToro.

76% of retail investor accounts lose money when trading CFDs with this provider. Consider whether you can afford the high risk of losing your money.

Prospects for the healthcare sector

The medical services market is very stable. This is because people and countries limit spending on this sector only in exceptional situations. Moreover, as society becomes wealthier, more and more resources will be allocated to medicine, which can benefit health care companies. Therefore, the prospects for this segment seem good. Additionally, It is conceivable that wider application of robotics and artificial intelligence in medicine, it will increase the efficiency of operations and reduce the prices of medical services. It can be expected that the diagnostic imaging sector will also experience a new boom, as algorithms will increase the detection of diseases at an early stage. This, in turn, may slightly disrupt the market for e.g. chemotherapy, because faster detection means fewer patients with advanced cancer, the treatment of which is very expensive. The saved funds can be used for other areas of medical services. It is difficult to predict in which areas the greatest technological progress will begin. For this reason, it is worth considering whether it is worth investing in ETFs that give exposure to health care companies. Of course, instead of one fund, you can choose several, e.g. technology, biotechnology or medical services, which should translate into greater security of our investments.