Pharma & Healthcare

TOP CONTRIBUTORS

Alexander Good

Steve Alexander

In 2007, the U.S. spent $2.26 trillion on health care, or $7,439 per person.^[1] Health care spending makes up about 16% of the US GDP.^[2] This gives the U.S. the dubious honor of being the number one health care spender in the world.

And as the average American gets older and fatter, there's no end in sight for the health care boom. About one third of American adults are obese, and studies predict that 41% of American adults will be obese by 2015. ^[3] Meanwhile, the number of Americans age 55 and older will almost double between now and 2030 – from 60 million today (21 percent of the total US population) to 107.6 million (31 percent of the population) – as the Aging Baby Boomers reach retirement age. ^[4] Indeed, health analysts predict that by 2017, health care spending will be at 19.5% of United States GDP.^[5]

The health care industry can be broken down into three main segments: Biotechnology and Drugs, Health Care Facilities (Hospitals and Health Care REITs), and Medical Equipment (Medical Appliances & Equipment, Medical Instruments & Supplies).

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 at right:

While the table highlights 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 take years to develop new treatment techniques, and 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 and private clinics, dialysis centers, hospitals, pharmacies, and other relevant medical establishments. When a pharmaceutical company wants to sell its treatments abroad, it will often sell to a foreign wholesale drug distributor and occasionally foreign hospitals. ^[7]

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

In the past year, the Biotechnology and Drugs industry significantly outperformed the S&P 500 ^[8] . A listing of publicly traded biotech/drug companies can be found here: Biotechnology and Drug Manufacturers - Other.

Companies like Pfizer (PFE) which primarily focus on drug manufacturing and distribution differ slightly from companies which develop both biotechnology and drugs. While not a fixed rule, companies which focus exclusively on drug development tend to target symptoms (arthritis pain) or temporary sickness (flu). Companies like Novo Nordisk A/S (NVO) which develop biotechnology often seek to cure more long lasting diseases and lasting conditions.

On whole, the major drug companies have outperformed the S&P 500, losing 11% in the past year. ^[9]

The top performing Drug Manufacturers - Major (which produce and market drugs exclusively) are as follows.

A complete list of these Major Drug companies can be found here: Drug Manufacturers - Major

Health Care Facilities

Health Care Facilities include Hospital operators and Health Care REITs that own medical properties. Companies in this sector 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 differentiate themselves by hiring 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, hospital operators like Universal Health Services (UHS) operate many hospitals and employ a large number of doctors. Nonetheless, it may contract to Quest Diagnostics (DGX) for its specific expertise in diagnosing cancer patients, including running complex lab tests on blood, urine, or hair samples. This practice is quite common, and Quest Diagnostics alone serves half of the hospitals in the United States. ^[10]

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

The health care facility industry has slightly outperformed the S&P 500 in the past year, losing about 14%. ^[11] The five most successful health care facility companies of 2007 are listed in the following table:

A list of health care facility companies can be found here: REIT - Healthcare and Hospitals.

Medical Equipment

Many treatment regimens require implants, or special devices. Companies like Medtronic invent devices that treat problems from spinal deformity to deafness. ^[12] 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. ^[13]

Medical equipment companies function as a mix between research/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 allow 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.

A complete list of companies in the Medical Instruments industry can be found here: Scientific & Technical Instruments

Industry Trends and Forces

America's Decaying Health: Aging Population and Obesity

Aging Baby Boomers will require large amounts of health care spending. A large percentage of the United States is approaching retirement and old age, so health care spending is due to increase because the elderly require more medication and care to deal with the complications of aging. Also, obesity has become a sizable problem in the United States, causing 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 hypertension.^[14]

It is important to remember that some major boons for the health care industry are double edged swords for the nation's economy. When people get sick, they need more medication, but their sick days also cost the labor force money. Each year obesity-related conditions cost billions dollars and cause an estimated 300,000 premature deaths in the US. ^[15] Obesity and old age can make the labor force less productive, and this could hurt the medical business in the long term if it slows the nation's economic growth.

Ethical and Legal Issues: The Politics of Life

As human cloning and genetic engineering move from science fiction into scientific reality, large societal groups 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). ^[16]

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 led many Americans to begin traveling to countries like India to receive treatment. ^[17] . As the world industrializes, the ability of the United States to maintain technological superiority diminishes. More Asian and Indian people are developing patents to compete with United States technology. This heightens the pressure on major U.S. medical companies to develop new blockbuster products.

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.

The most recent census breaks down the origin of health care profits.^[18]

References

1. ↑ National Health Expenditure Data
2. ↑ National Health Expenditure Data
3. ↑ Extensive Obesity Study
4. ↑ Aging America Fact Sheet
5. ↑ Health Spending Projections Through 2017
6. ↑ http://finance.google.com/finance?catid=64715132&hl=en
7. ↑ Amgen 10-k, pg. 1, 22
8. ↑ Performance of Biotech and Drugs vs. S&P 500
9. ↑ Major Drug Companies Google Finance List of Major Drug Companies
10. ↑ Quest Diagnostics 10-k, pg. 2
11. ↑ Health Care Facilities' Performance
12. ↑ Medtronic 10-k pg. 2
13. ↑ 2 Baxter 10-k pg. 2
14. ↑ Health Effects of Obesity
15. ↑ Obesity Statistics
16. ↑ Barack Obama's Campaign Site
17. ↑ American Patients Flock to India
18. ↑ http://finance.google.com/finance?catid=64715132&hl=en