One of the main reasons to invest in the healthcare industry is that the wealthiest individuals (the older ones) in Western countries are now reaching an age when they have increased healthcare requirements. One way or another, healthcare is subsidised in most countries and even where public healthcare is poor, insurance companies are exposed to the increasing costs of healthcare.
It's therefore reasonable to conclude that companies that can provide the best treatment at the lowest cost will generally dominate their market. That's certainly what's happened with CSL Limited (ASX: CSL). The blood plasma products company has an adequate supply of blood, extensive fractionating facilities and the largest distribution network for products. The MD recently described the company as a "protein science company," and its competitive advantage lies in its size as well as its depth of talent.
CSL can supply demand in all markets, and is an essential part of healthcare systems worldwide. If the company went on strike tomorrow, there would be very real, very tragic consequences for people all over the world. The share price is up a little since the half-yearly result, as the company continues to buy back shares. Investors have good reason to be confident that CSL will continue to invent new products, and use its existing scale to distribute them at competitive prices.
Another company that can save hospitals money is Azure Healthcare Ltd (ASX: AZV), which could be described as a technology company operating in the healthcare industry. A recent purchase of mine, Azure Healthcare sells patient management systems to hospitals all over the world. Essentially the company has expertise in setting up monitoring networks in institutions that need to monitor those inside. Potential clients include aged care facilities, hospitals and, you guessed it, prisons.
The company recorded drastically better results in the first half of FY 2014, as it increasingly provides more sophisticated network and software-based systems, rather than simply selling hardware used to monitor patients. Don't expect the company to repeat the profit growth of over 350% between H2 2013 and H1 2014 though.
Small-cap investors, Pie Funds, recently sold most of its shares in the company, with fund manager Mike Taylor commenting: "In the case of AZV, the majority of the position was sold at 27-29c. We have kept some as we think the stock is worth 36c and possibly 40c in a takeover." I don't like to find myself on the opposite side of the trade from Mike Taylor, but I did buy some shares at 27.5c recently. One risk facing the company is that governments around the world might reduce spending on healthcare, in an attempt to reduce deficits. The increasing number of people in both hospitals and aged care facilities should encourage operators to automate monitoring where possible.
Another stock exposed to the healthcare industry is Anteo Diagnostics Ltd (ASX: ADO), a company with a disruptive product, often described as molecular glue. Basically, Anteo's product, Mix&Go, appears to improve the functionality of a diverse range of diagnostic tests while potentially reducing manufacturing costs. Diagnostic tests that might eventually use Anteo's molecular glue include pregnancy tests and blood tests that can indicate heart damage.
When the CEO of Anteo Diagnostics announced a feasibility study (with a "global healthcare company") to evaluate Mix&Go last June, he commented "the ongoing feedback we receive from discussions with a number of other interested parties continues to be encouraging." While this may seem like a vague and promotional comment, it hints at the fact that if Mix&Go does prove to be a commercially attractive component for inclusion in diagnostic tests, it's likely that most if not all assay manufacturers would end up using it. Of course, one day Mix&Go may itself be replaced. If Anteo does end up selling its product to assay manufacturers, that will not be an immediate concern for current shareholders, who would probably be sitting on substantial capital gains.
Foolish takeaway
Anteo Diagnostics is undoubtedly a speculative investment until it has secured its first royalty stream from a major healthcare company (or otherwise developed sustainable cashflow). Azure Healthcare must string together a few more halves of profit growth before the company proves there is growing demand for its services (though I like the company's chances, at present). CSL is my favourite stock in the ASX S&P 20, the largest 20 Australian companies by market capitalisation. I think shares are rationally priced by the market, and I would buy if stock prices were marked down for short-sighted (or macroeconomic) reasons.
