The Healthcare sector is one of the most visible sector on the ASX. Instead of just throwing together a list of healthcare shares, we’ve put together a narrower list health care shares just in the ASX 300 and provided a context for the sub sectors so it is easier for investors to understand the sector.
We also like to just focus on the largest Healthcare companies because as you move from the list of companies outside of the index, the liquidity drops away significantly. There is enough risk and reward from investing in a smaller universe of better understood companies without taking on the liquidity risks of trying to get in and out of micro / small cap heath care stocks in our view.
Largest ASX Healthcare Company
This is similar to BHP in mining, Macquarie in infrastructure and Goodman in industrial real estate. CSL is Australia’s largest company in the heath sector and market leader in blood plasma, and one of the few Australian based global company listed on the ASX.
At the other extreme the smallest company on the list has a market cap cut of at around $150 million so any company smaller than this would be very hard to trade in and out with a meaningful investment holding.
ASX HealthCare Shares
The names of health care companies on the ASX comprise of some of the most well regarded Australian companies. These include CSL, Medibank and Cochlear.
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Best Healthcare Shares
The simplest macro classification is the health care sector but not all of these companies are created the same and operate with the same risk and rewards. Just like asset allocation decision can have meaningful impact on investment returns in the long run. Particular sectors of the health sector has its own risk and reward trade off depending on the exact segment of the market these companies operate in within the healthcare market.
The sector category can be further segregated into specialized areas in the broadly defined as:
- Pharmaceuticals
- Medical Equipment
- Medical Insurance
- Biotechnology
- Medical Service Providers / Aged Care Provider
The section below provides more details on each of the sub sectors mentioned, how investors commonly view the segments and expanding on the key risks investing in the particular sector.
Pharmaceuticals
Pharmaceutical companies are the most commonly referred to group of companies associated with the health sector. Simply pharma develops and distribute drugs. Examples for Australian pharmaceutical is Sigma Healthcare which owns and distribute the Herron brand.
The main risks for Pharma companies is the development process for new drugs which is a long and expensive process undergoing the trials, and the revenue impact of the drugs in its portfolio which will come off patent once the initial patent period expires.
Therefore the sustainability of the earnings of these companies are dependent on the drug development pipeline and the length of the key patents in their portfolio where they derive a large portion of their revenue from.
A subset of this is the pharmaceutical sector is the generics drug makers which we don’t really see in Australia. Generic pharmacy predominantly focus on manufacturing off patent drugs and compete purely on price and minimise the costs via the manufacturing process.
Medical Equipment
As the name suggest, the companies in this sub sector produces equipment to be used in the medical field. As result of its use in the medical sector, medical equipments are not simply built and sold but in many parts of the world it goes through various tests regimens setup by market regulators.
The prime example of this is the Food and Drug Administration (FDA) in the US which mission to oversee and tests all the new products coming to the market (not just on the drugs) in their purview meets the safety standards you would expect as a consumer.
Medical Insurance
Medical insurance providers like NIB and Medibank serves the broader population by providing healthcare coverage. Just like other insurance companies their role here is to underwrite the risks of the providing the services against the cost of occurrence and delivery of the solutions.
The low interest environment is not helping with the medical insurance inflation either as insurers is now more reliant than ever on the underwriting profits.
Also see our post on MPL vs NHF to see the relative performance of the 2 largest medical insurers in Australia in dealing with the above issue.
Biotechnology
Biotech stocks are the second most common group of health care stocks linked to the sector. The primary goal of the bio tech companies is purely focusing on the development of the new drugs and then either partner with an established pharmaceutical company to offset some of the risk or cashout the opportunity once the drug trials shows signs of promise that the product is better than the current options in the market.
Biotechs are on the higher risk end of the spectrum as drug development is high risk process. At one extreme if the biotech has enough of a pipeline it eventually becomes a pharma stock but this takes a multi decade process.
The most common level of growth is an idea to trial completion of a portfolio of drugs with the goal of selling a portfolio to the Pharma company.
This is one of the main reasons the P/E ratio of the list of health stocks is all over the place. The market values biotech on their expected value in the future, usually on a timeframe over multiple years and beyond the scope of the immediate earnings.
Medical Service Providers / Aged Care Provider
These are a group of companies which provide medical care services such as IVF, blood testing and retirement solutions (aged care). The services focus means they are at the forefront of the sector from the everyday consumer perspective and most has a brand profile which is just as important as the underlying quality of their services.