Investing in healthcare stocks and shares introduces investors to a massive industry that’s been around for centuries. Each year, trillions of dollars are spent worldwide fighting diseases – a trend that the World Health Organisation expects to continue to rise in the future.
The pandemic triggered a surge in fresh funding from governments and investors alike. And with this capital being allocated across a broad spectrum of research projects, the quality and quantity of healthcare products are forecast to rise rapidly. As a result, analysts predict the market opportunity for healthcare stocks will grow annually by double-digits over the next decade.
This obviously presents a potentially lucrative opportunity for investors. So, let’s explore the risks and rewards of investing in healthcare shares a bit further.
What are healthcare stocks?
Healthcare stocks are businesses focused on maximising the quality of patient care to let people live longer and healthier.
Typically, healthcare shares can be organised into one of four categories:
- Healthcare providers – These firms are on the front line, delivering healthcare to patients first-hand. Such businesses include hospitals, physician practises, nursing facilities, and more recently, telehealth providers.
- Drug developers – Companies engaged in researching and developing new treatments and medicines to tackle diseases, infections, mutations, and disorders.
- Medical device designers – Groups designing and manufacturing devices to improve the quality of patient care. This can range from something as simple as a stethoscope to as complex as surgical robots.
- Payers – While less common in the UK, this segment includes all the businesses involved in helping cover medical costs like health insurance providers and pharmacy benefit managers.
This is by far one of the largest and most complicated industries to operate in. Due to the high degree of importance and expertise needed when handling patients’ lives, regulations are extremely strict. And, in some cases, create prohibitively expensive barriers to entry.
For example, both drug developers and medical device designers need to receive regulatory approval in each country where they wish to offer their products.
Healthcare industry challenges
Here in the UK, that regulatory body is the Medicines & Healthcare Regulatory Agency (MHRA). In the US, it’s the Food & Drug Administration (FDA). And since every regulator has different standards and requirements, the price of checking off all the boxes gets expensive very quickly.
An approval prerequisite for drug developers requires clinical trials that can take over a decade to complete. Medical device designers need to demonstrate the safety and efficiency of their products with field data that’s expensive to gather.
Healthcare providers have to undergo similar approval processes, and payers are subject to significant financial oversight.
To put it simply, life is not easy for healthcare stocks. But for those that can overcome these regulatory hurdles without going bankrupt, an enormous market opportunity lies ahead. According to a 2020 report by the World Health Organisation, $8.3trn is spent annually on healthcare. That’s 10% of global GDP! And it’s still rising.
Therefore, it’s not surprising that some of the best-performing shares over the years operate within the healthcare sector.
Top healthcare shares in the UK
Let’s explore the top five healthcare providers on the London Stock Exchange in order of market capitalisation.
| Company | Category | Description |
| AstraZeneca (LSE:AZN) | Drug developer | One of the largest pharmaceutical companies in the world, specialising in a diverse range of diseases. |
| GlaxoSmithKline (LSE:GSK) | Drug developer | The global leader in vaccines, tackling some of the most challenging diseases today, including malaria and HIV. |
| Smith & Nephew (LSE:SN) | Medical devices | Expert manufacturer of devices and tools used by medical institutions. |
| Hikma Pharmaceuticals (LSE:HIK) | Drug developer | Leader in designing drug generics, improving costs and accessibility worldwide. |
| Spire Healthcare Group (LSE:SPI) | Healthcare provider | The UK’s largest independent network of private hospitals. |
AstraZeneca
AstraZeneca is one of the largest pharmaceutical companies and healthcare stocks in the world. Given its access to vast resources, the group develops new treatments for a wide range of diseases. The list includes cancer, cardiovascular, renal respiratory diseases, and immunology and other rarer conditions.
It already has a diverse portfolio of products on the market and, more recently, is known for its Covid vaccine. Looking at the current project pipeline, AstraZeneca has 183 drug candidates being researched, with 16 in late-stage development and two under regulatory review.
GlaxoSmithKline
GlaxoSmithKline is a global leader in vaccines and pharmaceutical treatments targeted at cancer, HIV, immuno-inflammatory, and respiratory diseases. The healthcare company has established research teams and manufacturing facilities worldwide, providing a global distribution network, particularly across the US, Europe and Asia.
With over 1,500 active partnerships with external pharmaceutical organisations and governments, GlaxoSmithKline stands out amongst the crowd of healthcare stocks. Until recently, It also had a consumer healthcare division that has since been spun off into its own company called Haleon. The group is now purely focused on developing new treatments.
Smith & Nephew
Founded in 1856, Smith & Nephew is one of the oldest medical device manufacturers in the world. The group operates in over 100 countries, supplying medical institutions with critical equipment and consumable accessories.
The healthcare stock is renowned for its expertise in wound management with its diverse portfolio of dressings, as well as products tackling other areas. The list includes orthopaedic reconstruction (knee, hip, and shoulder joint replacements), hospital imaging systems, trauma fixation products, and tools performing a variety of medical procedures.
Hikma Pharmaceuticals
Hikma Pharmaceuticals is a global drug developer with a massive portfolio of over 670 generic and in-licensed products on the market today. The group’s expertise in replicating off-patent medicines drastically reduces costs for patients while simultaneously improving accessibility.
Beyond the generics, Hikma also has its own drug development pipeline for new and bespoke treatments that target various therapeutic categories such as anti-infectives, cardiovascular, central nervous system, diabetes, cancer, respiratory, and pain management.
Spire Healthcare
Spire Healthcare is the UK’s largest independent hospital stock serving the private healthcare sector. The company has 47 facilities scattered across the country, providing the standard range of services, including diagnostics, inpatient care, and outpatient care.
The group collaborates with almost 8,150 experienced consultants to handle a long list of medical circumstances such as orthopaedics, gynaecology, cardiology, neurology, oncology, and general surgery.
Investing in the US healthcare industry
American healthcare stocks are bound to the same degree of regulatory restrictions. However, US healthcare spending represents almost half ($3.8trn) of the entire market worldwide. So, it’s hardly surprising that there is a far longer list of healthcare shares across the pond for investors to choose from.
Some of the leading names in this sector on the New York Stock Exchange and Nasdaq, in order of market capitalisation, are:
- Pfizer Inc (NYSE:PFE)
- Intuitive Surgical (NASDAQ:ISRG)
- Moderna (NASDAQ:MRNA)
- Masimo (NASDAQ:MASI)
- Teladoc (NYSE:TDOC)
Are healthcare stocks right for you?
While healthcare shares are often perceived as a relatively stable and safe place to invest, that’s often not the case. As I’ve already explained, the costs of operating in this sector are exceptionally high, especially for drug developers.
Consequently, these firms are typically highly leveraged, with enormous credit facilities being used to fund research, development, trials, and eventually manufacturing. That creates quite a bit of risk. After all, if a product fails during development or regulators decide it isn’t safe, a lot of capital can go down the drain.
Needless to say, this can make investing in healthcare stocks a risky endeavour. Even more so when it comes to the smaller players with restricted access to precious external financing.
That means healthcare shares probably aren’t suitable for everyone. But for those willing to take on the risk, there is a multi-trillion-dollar market opportunity available to profit from. And by taking a diversified approach, investors can potentially reap substantial returns through multiple channels.
Zaven Boyrazian owns shares in Masimo, Intuitive Surgical, and Teladoc.