Balanced choices

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The healthcare sector covers a range of pharmaceuticals and devices makers, to insurers and service providers. It’s a relatively heavily regulated industry with strict barriers to entry, but there are high rewards to those who succeed. In particular, there’s ongoing competition amongst pharmaceutical firms for 'blockbuster' drugs that generate at least $1b in sales per year. 

While biotechnology firms have been affected by the overall market downturn and rising interest rates, especially small caps without existing revenues or multiple products. General healthcare stocks are often characterised as defensive and can offer investors relative stability during an economic downturn. Their products and services are essential to the lives of many, with governments providing at least partial payments in many countries. 

There are also positive demographic trends that could help support the performance of the sector. Ageing populations and increases in living standards for emerging markets are expected to drive demand in the coming years. This means they could be an useful option for investors looking to diversify and hedge against trends in other industries such as tech. 

Unitedhealth Group Inc ($UNH)

The complicated nature of the U.S. healthcare system makes many see insurance as a key consideration and investors looking to gain exposure to this factor could be interested in Unitedhealth Group. The UnitedHealthcare platform provides healthcare coverage and benefit services, while the Optum business segment offers services supported by IT and data tools. 

During Q1 2023 the firm saw revenues grow 15% on a year-on-year basis, with a net margin of 6.1%. The UnitedHealthcare unit was responsible for revenues of $70.5b and had earnings of $4.3b, while Optum earned $3.7b from revenues of $54.1b. The latter is expected to maintain its faster growth rate, as its digital capabilities are being integrated into offerings by care providers and health plans. 

Unitedhealth reaches an estimated 150 million Americans through its services and its closest competitor is generally considered to be CVS Health ($CVS). With the acquisition of UnitedHealth’s insurance rival Aetna in 2018, CVS has moved beyond its traditional retail pharmacy model, while Optum has established a retail presence. Both companies put consumer focus at the centre of their growth strategies and investors can decide which approach they expect to be more successful. 

Johnson & Johnson ($JNJ)

Johnson & Johnson (J&J) is one of the largest healthcare companies in the world, with over $23.7b in global drug sales in Q1 2023. It operates across the pharmaceutical and medical devices market, with sales almost evenly split between the U.S. and other markets. The pharmaceutical segment accounted for $5.8b of sales, while medical devices brought in $2.0b in the latest quarter. 

The company’s proposed payment of $8.9b over 25 years to settle claims that its talc products caused cancer reveals one risk investors in the sector need to consider. J&J also expects its high earning immunology drug Stelara to lose exclusivity in late 2023. This reveals the importance of having multiple income streams to reduce the impact of the end of a patient's life in the pharmaceutical sector. 

Their consumer health segment has recently been spun out into a newly publicly traded firm called Kenvue ($KVUE). This has been one of the largest IPOs in the past 18 months and J&J will gradually reduce its stake down from just over 90% at listing date. Prominent names such as  Neutrogena, Listerine,  Band-Aid and Nicorette have found a new home in the firm, which has ten brands with at least $400m in annual revenues. Essential health, self-care, skin health and beauty products are its three major divisions. 

Pfizer ($PFE)

Pfizer is a research-based pharmaceutical company that develops and produces drugs for a number of medical conditions, including cancer, cardiovascular disease, and inflammatory disorders. As a firm that produced both a vaccine and treatment for COVID-19, Pfizer's recent results have been closely tied to the pandemic. Total revenue hit a record $100.33b in 2022, from which COVID treatments accounted for $56.74b. 

As demand has waned and government contracts for these products have ended, Pfizer saw a 30% decline in income during Q1 2023. They’re emphasising new launches in 2023 to offset these falling sales. Significant ones include migraine medication Zavzpret and the Prevnar pneumonia vaccine for children. Integrating their biotech acquisition, Seagen, brings more opportunities, as well as costs over the next 18 months.  

Pfizer and its COVID vaccine rival Moderna ($MRNA) are working on respiratory syncytial virus (RSV) vaccines, which could help protect young and old patients from serious respiratory infections. GlaxoSmithKline ($GSK) has actually reached the market first with its  Arexy RSV vaccine approved in the U.S. in May 2023 and many consider the market to be too small to be the defining factor for the first time firm’s share prices this year. Moderna’s potential cancer vaccine is likely to be more important to the stock’s performance instead. 

Full treatment

While demand for basic services remains relatively stable, the healthcare industry is not immune to trends. For example, many view obesity medications as a popular theme in 2023. 

Investors should keep in mind that marketing materials can contain lots of technical terms or industry-specific language, which can present a challenge for those trying to analyse firms and products without a scientific or technical background. 

For investors looking to gain general exposure to the industry, rather than specific firms there are several ETF options available. The iShares Global Healthcare ETF ($IXJ) covers a broad range of businesses in the sector across developed markets, while Vanguard Health Care ETF ($VHT) has those listed in the U.S. If interested in capturing the possible gains from new technologies and drugs, the large pharmaceutical businesses in the iShares U.S. Pharmaceuticals ETF ($IHE) represents a more targeted approach for investors. 

Those searching for the latest events could find biotech companies to suit their tastes. Those with high risk appetites could invest in leveraged products like the Direxion Daily S&P Biotech Bull 3X Shares ETF ($LABU), which aims to return 300% of the biotech companies on the S&P. However, like its inverse option, the Direxion Daily S&P Biotech Bear 3X Shares ($LABD), these financial instruments can have very volatile returns and are very different to large healthcare firms characterised as resilient against general macroeconomic conditions.