Pharma & Healthcare

TOP CONTRIBUTORS

Alexander Good

Steve Alexander

In 2007, the U.S. spent a projected $2.26 trillion on health care, or $7,439 per person. Every year, the United States incurs a $7,000 health care expense for each of its citizens, holding the dubious honor of the number one health care spender in the world. This spending makes up about 16% of the US GDP- $2.26 trillion to be exact. ^[1] The average American is growing older and fatter, and therefore more likely to get sick or die. Thus, health care spending will probably increase to 19.5% of United States GDP by 2017.^[2]

Despite its simple purpose to make people live longer and better, the health care industry operates in varied and complex ways.

Companies Involved

All companies which generate revenues by alleviating sickness can be classified as health care companies. In aggregate, the health care industry has outperformed the S&P 500 for the past year, even though it still lost money on average. After all, people still need treatment in recessions. The most successful companies of 2007 are listed in the table below:

While the table above helps highlight who the big players are, net income may be inadequate as a way to compare health care companies. Helping sick people requires everything from facility providers to researchers to develop new drugs. It is difficult to compare the value of a research facility to an old folks home, so understanding the health care industry means breaking it down into segments. These are pictured in the following table, and then described in the paragraphs below.

Biotechnology and Drugs

The Biotechnology industry is highly regulated, and new drugs and genetic research can only make money with government approval and copyright protection. Research companies go through a long process to develop new treatment techniques that can take years. Once a health solution is developed, the company must set an acceptable price. The price of the treatment in the United States is shaped by the willingness of the government or private payer health care programs (like health insurance) to pay. Due to controversy surrounding pharmaceutical companies in the past decade, insurance companies and the government are increasingly unwilling to subsidize new treatments. Biotechnology and drug sales are further complicated when dealing with foreign countries, who have differing ability to pay and very different medical systems.

To make the sales process smoother, biotech companies hire sales teams. Domestic pharmaceutical companies market to health care providers including physicians or their clinics, dialysis centers, hospitals, pharmacies, and other relevant medical establishments. When a pharmaceutical company wants to sell its treatments abroad, it often will sell to a foreign wholesale drug distributor and occasionally foreign hospitals. ^[3]

The following table outlines the five most successful biotechnology and drug companies of 2007.

In the past year, the Biotechnology and Drugs industry lost 6.49%, while the S&P 500 lost 16.78%. A complete listing of publicly trade biotech/drug companies can be found here: http://finance.google.com/finance?catid=52981623.

Health Care Facilities

Health Care Facilities deal most directly with patients. The Health Care Facility industry comprises companies which own treatment facilities, or provide them with physicians ,consultants, and other relevant medical personnel. These companies provide all kinds of care, from psychiatric to radiation oncology (cancer treatment).

Patients have many options in terms of choosing Health Care facilities, so hospitals and nursing homes must try to differentiate themselves by hiring the most competent staff and providing the most streamlined and simple service possible. This means hiring the best technicians, doctors, nurses and consultants, and buying the best diagnostic machinery possible. Because of the many skills required to run effective care facilities, many types of companies exist within the Health Care facility business. For example, Universal Health Services (UHS) operates many hospitals and employs a large number of doctors. Nonetheless, it may contract to Quest Diagnostics (DGX) to expertly diagnose its cancer patients. This may include running complex lab tests on blood, urine, or hair samples. This practice is quite common, and Quest Diagnostics alone services half of the hospitals in the United States. ^[4]

Some health care facility companies like Health Care REIT (HCN) literally rent out hospitals and nursing homes, and are known as Health Care REIT (HCN)s.

The health care facility industry has slightly outperformed the S&P 500 in the past year, losing about 14%. ^[5] The five most successful health care facility companies of 2007 are listed in the following table:

A complete list of health care facility companies can be found here: http://finance.google.com/finance?catid=66518437 .

Major Drugs

Major drug companies are very similar to biotechnology firms in the sense that they develop treatments for illnesses. Despite large synergies between the drug business and the biotechnology business, the drug business differs substantially from the biotechnology business.

Successful drug companies have two salient characteristics.

1. Quality research and development. A truly groundbreaking drug does not incur heavy marketing expenses because it sells itself. Good safety research helps avoid massive legal expenses down the road. 2. Excellent marketing and distribution. Drugs have a large first mover's advantage in the sense that once a drug is established on the market, its competitors have serious difficulty dislodging it, even when offering lower prices. This is because the health care industry is risk averse, as it deals with life and death.

On whole, the major drug companies have outperformed the S&P 500, losing 11% in the past year. ^[6]

The top performing major drug companies in 2007 are as follows:

A complete list of Major Drug companies can be found here: http://finance.google.com/finance?catid=50631762

Medical equipment

Many treatment regimens require implants, or special devices. Companies like Medtronic invent devices that treat problems from spinal deformity to deafness. ^[7] Companies like Baxter develop life-support devices, like kidney dialysis machines. Medical equipment companies invent and frequently manufacture the high tech equipment which hospitals and nursing homes use every day to save lives. ^[8]

Medical equipment companies function as a mix between research and development companies, and industrial manufacturers. It is critical that medical equipment is reliable, easy to fix, and delivered on time. The superior resources of medical equipment giants allows them to develop treatment technology, or even buy patents allowing them to offer new products.

The medical equipment and supply industry was the only part of health-care that did well this past year. The average stock in this industry yielded 2.14%, whereas the S&P has lost over 17%. The following companies were the most profitable medical equipment corporations in 2007.

Industry Trends and Forces

America's Decaying Health: Aging Population and Obesity

Aging Baby Boomers will likely require large amounts of health care spending. Because a large group of the United States is approaching retirement and old age, health care spending will likely increase. Also, Obesity has become a sizable problem in the United States, likely to cause widespread health problems. Complications of a poor diet and complacency will likely increase the number of Americans needing treatment for diabetes, back and heart problems, and cancer.

It is important to remember that any so-called boon for the health care industry is a double edged sword. A growingly unhealthy nation cannot hope to produce as much, and eventually must limit its consumption or suffer dire consequences. A more sickly and obese nation will hurt the economy enough to cancel many of the upsides for medical balance sheets.

Ethical and Legal Issues: The Politics of Life

As human cloning and genetic engineering move from science fiction into scientific reality, large societal groups may strongly and even violently disapprove. For example religious conservatives may view genetic alteration as immoral, and lobby the government to ban it. Stem cell research , for instance, is already facing such opposition.

As drugs combat more complex illnesses, they also have more unpredictable side effects. Fiascoes surrounding harmful drugs like Ephedrine and Vioxx have made the government investigate drugs more closely before permitting their release. This lowers the profitability of most drugs for companies, as they must wait longer before they are approved and released.

Additionally, most of the world outside of the United States views health care as a human right. This is a growing viewpoint on the American left. Presidential Candidate Barack Obama would like to use government funding to cover all Americans (there are currently as many as 47 million uninsured Americans). ^[9] This is a step towards socialized medicine, which would have unpredictable effects on the American health care system.

International Competition

Among industrialized nations, the United States health care system is ranked poorly by the CIA World Fact Book and the World Health Organization, and is one of the most expensive in the world. The high cost of American health care has even led many Americans to begin traveling to countries like India to receive treatment. ^[10] . As the world industrializes, the ability of the United States to maintain technological superiority will likely diminish. More Asian and Indian people will be able to develop patents to compete with United States technology. This may have serious effects on the profits of major medical companies.

Market Share

The health care industry is composed of many smaller directly competitive markets. Because major drug companies do not directly compete with genetics research companies, retirement homes, or dentists, it would be improper to delineate companies as 'holding' a percentage of all health care business. It is helpful, however, to understand from what market segments the health care industry gains its profits.

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