Investing in Health

Medical Life Magazine - April 2011 Edition (Read the PDF version here.)

Which new technologies or health sectors should you invest in?

We’re an ageing population, and more importantly we are demanding better and more effective health care. As a result, industries related to medical technologies and health services are increasingly in demand. But which of these medical technologies and health service providers have you heard of and which should you invest in?

Established companies

Investing in these larger listed companies will offer you a nice slice of the healthcare pie. Let’s see what these well-established healthcare companies are doing.

Medical Technologies

CSL

CSL’s business is involved in producing life-saving products derived from human plasma, pharmaceuticals and diagnostics essential to community health, and animal health vaccines and diagnostics to protect livestock and companion animals. With an increasingly ageing population demand for blood plasma products will also continue to grow.

CSL has significant scale which enables it to lower its costs considerably. It also has pricing power, given that it controls supply. Recently, the strength of the Australian dollar has negatively impacted earnings; however, we expect exchange rate volatility to settle down over time which will allow CSL to deliver improved earnings.

The other risk to CSL remains dependant on the regulatory changes from governments which may prevent them from charging their current prices. CSL’s Environment rating from EcoInvestor has recently been increased from 4 to 5 stars. The company has also published its first Corporate Responsibility report detailing significant improvements in its environmental performance, particularly in its energy and water use.

Total Shareholder Return (average annual rate) 1 year 10.2%, 10 year 13.6%

Sonic Healthcare

Sonic Healthcare Limited (SHL) is an international medical diagnostics company, providing pathology and radiology services in Australia, the UK, US, New Zealand, Germany and Hong Kong. SHL´s competitive advantage is aligning the interest of its pathologists and radiologists to grow revenues through profit share agreements.

Strong cash flow generation means the balance sheet remains healthy and healthcare expenditure is set to increase faster than inflation as the population ages and the demand for services increase. Combining this with acquisitions will lead to increased earnings growth over the next five years.

Sonic has recently announced the acquisition of Central Coast Pathology Consultants (CCPC) located in California, USA. Given that the acquisitions of their centres in the US and Europe are sunk costs, these operations should soon start to deliver earnings growth. While domestically, Sonic’s operations have consistent cash flow and good scale which makes it difficult for competitors to enter the market. However, the main risk to continued growth is a policy shift by government that would reduce diagnostic expenditure.

Total Shareholder Return (average annual rate) 1 year -9.3%, 10 year 7.4%

Natural Medicine

Blackmores

Blackmores (BKL) manufactures and markets vitamins, minerals and herbal supplements as well as natural beauty products: throughout Australia and South East Asia. Health awareness and education is also offered.

Blackmores provides customers with access to a team of health experts to give advice on natural healthcare, research findings, issues, news and information on products. Healthy living is integrated as part of their corporate culture. Staff are served healthy meals in the staff canteen, and have access to a fitness program at the local health centre. Looking after the environment is also a priority for them.

In 1995 the company's warehouse and distribution centre won the Environment Achievement Award for Industry in the Warringah area, for initiatives to reduce waste, water, and energy consumption. The management of Blackmores has an excellent track record.

The brand remains well-trusted and this means that replicating their success is difficult. Additionally demand is increasing for complementary medicines, as they become more accepted as mainstream. Blackmore’s current focus is on the domestic market but future growth will be seen in Asia.  

Total Shareholder Return (average annual rate) 1 year 46.80% 10 year 23.00%

Health and Medical Services

Primary HealthCare

Primary Health Care Ltd (PRY) Limited provides a range of services and facilities to those medical professionals that run their own practices at their medical centres, licensed day surgeries, specialist and dental clinics. The group’s earnings are made up as follows: Pathology 40%, Medical Centres 40%, Radiology 15% and Health Technology 5%.

The group has recently established new centres in Victoria and the Australian Capital Territory. With these new additions, the group now has a total of 31 large scale medical centres. Additionally, the group also owns and operates SDS Pathology located at North Ryde, Sydney.

The laboratory services Primary Health Care’s Medical Centre’s and other practitioners and health care providers. The medical centres are a lucrative part of the business with EBITDA margins running at 55%. These high margins deliver a great return. However, there is a risk that they may be reduced if the government looks at cutting costs and rolling out public healthcare centres to alleviate the pressure on hospitals.

Total Shareholder Return (average annual rate) 1 year -13.1%, 10 year 3.0%

Medical Property

In addition to the above sectors, you can look at investing in hospitals and medical centres.  

Australian Unity Healthcare Property Trust

The Australian Unity Healthcare Property Trust owns the physical infrastructure supporting the healthcare system, including the land, bricks and mortar of hospitals, medical clinics, nursing homes, day surgeries, consulting rooms, rehabilitation units, radiology and pathology centres.

The properties are geographically diverse and include regional areas, such as the Ipswich Medical Centre and Day Surgery, and Illawarra Private Hospital. Some of the major tenants include Ramsay Health, Sonic Health, Vision Group, Calvary Health, and Healthscope.

The wholesale fund has returned 7.65% over the past 12 months, and 11.27% pa over the past 5 years (for the period ended 31 January 2011).

Ramsay Healthcare

Ramsay Healthcare Ltd (RHC) has a mixture of acute surgical, regional and psychiatric hospitals which are located throughout Australia. They have grown to a global group with operations in the UK, France and Indonesia. Certain hospitals hold a competitive advantage over other participants, because Ramsay hospitals have a superior location, reputation and scale.

There is also scope for further growth as they take their business model overseas for further expansion.  It is also important to note however, that as a private hospital operator, Ramsay is reliant on the health of the private insurance industry. Any regulatory change or economic weakness could result in a contraction of spending which could deprive the private industry of funds.

Total Shareholder Return (average annual rate) 1 year 43.6%, 10 year 26.0%

New companies

If your risk appetite is large and you are keen to support the new players in the market, then you might like to consider the following companies which are making medical advances.

Medical IT

iSOFT Group

iSOFT Group Ltd (ISF) provides healthcare information systems and e-health services to public and private hospitals as well as community and primary care organisations. Installations are in hospitals and clinics in the UK, Europe, Australia, New Zealand, Asia and the Middle East.

The technology and communication solutions are designed to connect providers, payers, patients and communities. The software works across hospitals, clinics, aged care and primary care, as well as, claims and payment processes.

They also offer financial software (accounting and purchasing), and bespoke solutions. It currently has a weak balance sheet, as they are at the early rollout stage. However, they do have an opportunity for growth as government is committed to spending on IT infrastructure for the healthcare sector. As the business risk remains high, this stock would only be suitable for investors with a high risk appetite.

Total Shareholder Return (average annual rate) 1 year -87.2%, 10 year -12.8%

Medical Technologies  

• Alchemia Ltd (ACL)  - develops anti-coagulant and cancer drugs.
• Avita Medial Ltd (AVH) - regenerative and respiratory medicine.
• Circadian Ltd (CIR) - cancer therapies.
• Phosphagenics Ltd (POH) - bloodstream delivery systems.
• Resonance Health Ltd (RHT) - magnetic resonance imaging.
• ResMed Inc (RMD) - sleep and breathing disorders
• Tissue Therapies Ltd (TIS) - wound healing.

Returns

Investing in the healthcare sector in the past has been financially rewarding. The S&P / ASX 200 Health Care Accumulation Index has risen +12.09% over the last year (to 31 January 2011). While the 5-year return is an outstanding +10.03%.

Like to find out more?

If you’d like more information about the above investments, feel free to contact Karen McLeod.  Karen McLeod is an Authorised Representative (No. 242000) of Ethical Investment Advisers (AFSL 276544). We provide investment advice for ethically-minded and socially-conscious investors. 

Returns information sourced from Morningstar, www.morningstar.com.au