Investing in healthcare stocks and shares can be a bit of a daunting endeavour. It’s one of the largest and most diverse stock market sectors out there, after all. At some point in life, everyone is dependent on this industry to keep us healthy, whether it be an emergency visit to the hospital or seeking consultation about an illness. So, it’s unlikely demand for healthcare will disappear anytime soon.

With that in mind, let’s dive into this industry in more detail, exploring the major trends, growth opportunities, and risks investors ought to know about.

What are Healthcare Stocks?

Healthcare stocks represent a wide variety of companies, each offering a broad range of services. That’s why The Money Cog has broken down each one in more detail.

But generally speaking, each company can be organised into one of four categories:

• Healthcare Facilities – Healthcare shares that own and operate hospitals, clinics, laboratories, mental health facilities, and nursing homes, as well as provide various healthcare services. Spire Healthcare Group Plc is a noteworthy growth stock in this category.
• Health Insurance – The financial firms that provide insurance coverage to patients in exchange for monthly premiums. Investing in these types of healthcare stocks is more prominent outside of the UK.
• Healthcare Technology – The companies developing innovative solutions to optimise and improve healthcare. Teladoc Health serves as a leader in telemedicine.
• Medical Equipment – Includes the companies that are involved with the design and manufacturing of a medical device or equipment. Some leading businesses in this space include Intuitive Surgical and Masimo.
• Pharmaceuticals & Biotech – Biotech stocks and pharmaceutical stocks are the companies researching and developing medicines and treatments to help patients combat diseases. Leading names include Johnson & Johnson, GlaxoSmithKline, and AstraZeneca.

Despite its maturity as a sector, there continue to be new and exciting opportunities for investors to take advantage of. At least, that’s what I think. Looking at some of the most prominent trends today:

• There is a vast opportunity within the industry to make data available for everyone. This will help small-scale healthcare stocks to get access to information. Moreover, it will also help decrease the cost of research.
• Just like Uber and Airbnb, the healthcare industry has huge room for such platforms where patients, doctors, physicians, and ambulances can connect with ease.
• With the rise of electronic healthcare records, the opportunity for Medical Record Management services is an excellent opportunity to take advantage.
• Despite being available, there is a big demand for quality healthcare. And with medium to low investment, healthcare professionals with the right credentials and expertise can start open Diagnostic Centers, Fertility Clinics, Eye Clinics, Medical Equipment Stores, and Medical Shops.

The Risks and Challenges Faced by Healthcare Shares

The changing trends in the healthcare sector bring newfound challenges and risks to the industry. Besides the already complex legal and regulatory environment, even the best healthcare stocks have to learn to manage a new generation of threats that the pandemic has arguably amplified.

Here are some of the most prominent threats these healthcare companies are currently having to deal with:

• Cyber-Attacks – Electronic patient records have undoubtedly improved the speed, quality, and communication of the healthcare sector. However, like all digital infrastructure, these patient files can now be hacked. And any successful breach of cyber-defences could land a healthcare firm in a world of legal trouble due to the sensitive nature of the data.
• Telemedicine Negligence – During the height of the pandemic, telemedicine was an effective method of consulting patients and seeking medical advice for non-emergencies. However, today there are no set standards or guidelines on how companies can interact with patients beyond what’s already in place. It’s possible that poor quality advice could be given that leads to more serious complications due to the inability to give a physical exam.
• Labour Shortage – Hiring doctors, nurses, and technicians is not exactly a straightforward process. These individuals need to be highly skilled, and it can take a long time to fill vacancies.

Key Financial Metrics to Watch when Investing in Healthcare Stocks

When thinking about investing in healthcare shares, it’s essential to be able to analyse their financial statements. Every industry requires a slightly different approach when it comes to judging performance. But in my experience, the best financial metrics to watch when investigating healthcare stocks are:

• Operating Margin – Reveals how much profit is being generated by operations alone. How does it compare against competitors?
• Operating EBITDA Margin – This metric indicates the organisation’s profitability from daily operating activities.
• Days Cash on Hand – Days cash on hand is a liquidity measure that reveals how many days a company can last with its existing cash on the balance sheet.
• Debt to Capitalisation – Quick methods to evaluate the level of outstanding debt inside a business’s capital structure. Since running a healthcare firm isn’t exactly cheap, seeing high degrees of financial leverage isn’t uncommon. But it’s essential to check whether it’s sustainable.
• Capital Spending – It measures the healthcare provider’s capital expenditure as a percentage of annual depreciation.
• Plant Age – It indicates the financial age of the fixed assets of a healthcare facility like a hospital. Older assets are more likely to require renovation and maintenance to remain functional.

Key Terms to Know before Investing in Healthcare Stocks

Every sector has its language, which is very important to know to better understand the dynamics of the industry. And healthcare is no exception. Due to the complex nature of these shares, there is quite a lot of jargon thrown around.

Here are some of the key terms important to know about:

• The Average Length of Stay – The average number of days a particular class of patient stays at the hospital.
• Maintained Bed Occupancy – A measure of the volume and utilisation of inpatient services.
• Balance Billing – Balance billing refers to the ability to bill the patient for the remaining cost of the service not reimbursed by insurance.
• Primary Care Provider (PCP) – The PCP is the main health care provider for non-emergency situations.
• Telepractice – Telepractice is the application of telecommunications technology to deliver professional services at a distance.
• The Agency for Healthcare Research and Quality’s (AHRQ) – AHRQ’s mission is to improve the quality, safety, efficiency, and effectiveness of health care for all Americans.
• American Association of Health Plans (AAHP) – The trade organisation that represents managed care organisations (HMOs and PPOs).
• CDC – Centers for Disease Control and Prevention.
• CMS – Centers for Medicare and Medicaid Services.

Market size and Forecasted Growth of the Healthcare Industry

In the United States alone, national healthcare expenditure in 2020 reached a staggering $4.1trn. That’s roughly the same as $12,530 per person and is about half of global healthcare spending, which stood at around $8.3trn.

Yet moving forward, as population figures continue to grow, these expenditures are expected to continue to rise, reaching $6.2trn in the US alone.

Needless to say, that presents quite a lucrative opportunity for healthcare shares and individuals thinking about investing in them.

In the coming years, the healthcare industry is expected to see a lot of changes.

• Virtual Care will become more common. Increasingly, patients will not be differentiating between in-person consultancy and virtual consultancy.
• The shift from monitoring to active treatment at home. Patients will be equipped with the right tools and equipment to handle common symptoms of chronic diseases at home.
• The use of real-world data to inform and streamline drug delivery and development.
• AI is bringing a huge change in modern-day healthcare delivery. With AI, machines will be able to comprehend, sense, learn and act like humans. Moreover, they will be able to assist doctors in clinical and administrative healthcare functions.

Top Healthcare Stocks in the UK by Market Capitalisation

Let’s explore the top five businesses by market capitalisation within this stock market sector listed on the London Stock Exchange.

Top Healthcare Stocks in the US by Market Capitalisation

Below are the top five largest companies in this space listed in North America.

Should I Invest in Healthcare Shares?

Without a doubt, the healthcare sector is a complex web of companies under which a wide variety of companies fall. Moreover, the Covid-19 pandemic has brought many changes in the way healthcare stocks conduct their businesses. As a result of these changes, many new trends have emerged. And the industry is growing by adopting these changes.

I believe investing in healthcare stocks is a smart move for my portfolio. The shifting dynamics present plenty of opportunities for healthcare providers to capitalise and thrive. And it’s probably why these businesses can often be found inside of a mutual fund.

But I will admit there is plenty of risks involved with such an investment. So investing in healthcare shares is most likely not suitable for every investor since there are significant risks to consider.

Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has published Premium reports on Intuitive Surgical, Teladoc, and Masimo. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.