The healthcare sector includes many industries, sub-industries, and a wide variety of companies. Any company involved in products and services related to health and medical care are represented in the healthcare sector and further categorized under six main industries. These industries include pharmaceuticals, biotechnology, equipment, distribution, facilities, and managed health care. In this report, we will discuss each industry in further detail, highlighting the various aspects of the supply chain as well as discuss the healthcare sector and its relation to the overall market.
Pharmaceuticals The pharmaceutical sub-industry has been interesting to follow lately because of these affects that the Affordable Care Act have had on it. When the Affordable Care Act first was signed into law the sub-industry struggled at first because of the new costs that stemmed from the bill. Those costs did not end up holding these firms back because once 2014 started a lot of firms, including Regeneron Pharmaceuticals, reported high revenues in their earnings reports. This is most likely because of all the new patients that the Affordable Care Act has given coverage to and thus allowing them to enter the market.
Biotechnology The biotechnology industry’s constituents derive their value from
their ability to develop, manufacture and market novel, patented medicines that
generate multibillion dollar revenues (Wang). Compared to pharmaceutical companies,
biotechnology firms are regarded as younger, faster growing and more innovative (Wang).
Biotech companies also differ from pharmaceutical companies because they seek to develop
new drug therapies strictly using biological processes rather than the chemical processes.
Biological processes use living factories such as microbes or cell lines that are genetically
modified to produce treatments (Biotechnology by Amgen). Examples of treatments are as common
as insulin injections and as complex as using gene therapy to replace defective genes in patients.
Over the last year the biotech industry has seen considerable growth compared to the S&P 500.
Comparing the performance of the NASDAQ Biotechnology Index (NBI) and the S&P 500 ETF Trust (SPY),
the biotech industry has outperformed the S&P 500 by 60.20% (Yahoo Finance).
Equipment Like drug companies, equipment is another important product of healthcare. The equipment industry consists of manufacturers of health care equipment and medical devices, creating products such as medical instruments, drug delivery systems, cardiovascular & orthopedic devices and diagnostic equipment (Investing). These products are distributed to hospitals and doctors and are used in the medical treatment of patients. Medtronic is an example of an equipment company that specializes in producing devices that are implanted into patients during surgical procedures. As for its valuation ratios, they are all significantly lower than the sector average. Although this can indicate a somewhat cheap stock, all the ratios are very much in line with the equipment industry average (Medtronic). With so many drug and equipment companies continuously creating products, there is need for a distribution industry.
Distribution Distribution in an essential part of the healthcare sector supply chain. It represents all distributors and wholesalers of health care products. This can include companies anywhere from pharmacies to wholesalers of equipment. With more and more drugs and equipment being produced, the distribution industry is quickly growing. For example AmerisourceBergen, one of America’s largest distribution companies, has had a 485% increase in stock price over the last five years (AmerisourceBergen Corp). With a successful distribution industry, drug and equipment companies are able to effectively get their products to hospitals and other health care facilities.
Facilities Healthcare facilities are the health care providers in the healthcare sector. It is where medicines are delivered to needing patients and where doctors practice medicine. In this sub-industry, companies provide a wide range of health care and social services through hospitals, doctors' offices, nursing homes, outpatient surgery centers, and other facilities. In the last two years, the industry growth is lower than the average healthcare sector growth. The healthcare facilities industry is under great pressure of revenue growth. The hospital industry has a combined revenue of $ 700 billion per year, but the top 50 organizations generate less than 30 percent of revenue (first research inc.). Cost is relatively high in this industry because hospitals need expensive equipment such CT and MRI machines in order to operate. Another cost factor is the labor cost, sometimes making up as high as 40% of total revenue. The current trend for the industry is merging with competing facilities or even health insurance companies in order to provide more cost-effective care.
Managed Health Care The managed health care sub-industry is described as a variety of techniques intended to reduce the cost of providing health benefits and improve the quality of care, in other words it is the health insurance industry. Compared with other sub-industries within the healthcare sector, managed health care has a higher rate of growth. As the health care act reform requires that everyone be insured, it is a great opportunity for insurance companies.
Key Macro Drivers The healthcare sector has various key macro drivers associated with it. One of the main factors affecting health care is government regulation. This most significantly affects the pharmaceutical and biotechnology companies. Many trials and numerous tests are required for any drug to be considered for approval by the FDA and on average takes about 12 years to develop (Fact Sheet). Along with a significant time frame, it is also extremely expensive to create a new drug, with a $5 billion average cost (Herper). In addition to government regulation, unemployment has had an impact on the healthcare sector. Over half of Americans get their health insurance from their employer and when there is high unemployment, many people go without insurance and do not spend as much money on health services or products (Health Coverage).
Life Cycle Every industry has a life cycle with four phases; there is an early phase, innovation phase, maturity phase and decline phase. The healthcare sector is in the maturity phase. In the maturity phase, companies settle on their key product and economies of scale are achieved. Additionally in this phase, smaller companies are forced out of the market or are acquired and the barriers to enter the market become very high. The companies that are left in this market no longer focus on the company growth; instead they focus on market share and cash flow in this phase.
Competitive Landscape Demand for health care services is driven by demographics, advances in medical care and technology. However, the healthcare industry is very special because the relationship between supply and demand is inelastic. One reason for this inelastic demand is that consumers usually do not directly pay for health care service. Over 80% of health care is paid by insurance carriers and taxpayer funded programs (Baker. 2013). As long as people do not pay for health care out of their own pocket, most people do not care and pick the product like they were buying other commercial goods. The other important reason is that healthcare is nothing like other products that are on the market; people only go to hospitals when they have to, not because they want to. The healthcare industry has very little competition because of the unique inelastic demand, especially in managed health care and health care facilities.