All Eyes on the Health Care Sector

The second largest sector by market capitalization, and the most complex. 

Right now, we are counting on two pharmaceutical companies to deliver a COVID vaccination. Soon.

The two companies are Pfizer and Moderna. In the last few days Astra Zeneca became another possible provider of the vaccine.

A successful vaccine is the key to restarting our lives and our economy.

As an investor the question I have is: should I buy their stock?

Health Care is one big piece of the critical infrastructure that drives our economy. 

There are cybersecurity issues, we count on supply chain management to deliver hospital equipment and supplies. During this pandemic we are relying on, and the government is relying on all the resources in the Health Care sector to help us.

Patients Left in the Dark After Cyberattack

The reason I am providing a “deep dive” into this sector is that “Health Care” lumps together very diverse companies. Unlike other sectors, there are more differences than similarities in the companies that make up this sector.

To understand how to invest in this broad sector we need to look at the eight subsectors to identify companies, mutual funds, and exchange traded funds to invest in.

As a little side note, there is complete transparency of holdings in an ETF. You can see what companies the ETF owns on a daily basis. Unlike mutual funds where the holdings of the fund are not visible daily.

Earlier in the year a biotech company looked to have a viable treatment for COVID called Remdesivir . The company is Gilead Sciences. The stock briefly peaked on the news and then sank when the expected results did not materialize. I own stock in Gilead Sciences. I bought it in 2018 and so far the performance has been disappointing.

I am “underwater”. The stock is worth less today than when I originally bought it.

 Am I devastated? No.

 Do I think I made a mistake? No.

 Am I going to continue to hold it? Yes.

Why?

Gilead falls into the Biotechnology subsector of Health Care.

Biotechnology companies are considered “riskier” because the success of a product like Remdesivir can take a decade. Many products from biotech are never approved.

I have a small position in my portfolio. Although the company is riskier than other company stock I own, my position is small so I’m happy to wait it out. 

As an investor it helps to know something about what each subsector does.

Biotechnology:

Originally biotechnology was used in agriculture to produce better crops. Today biotechnology includes the discovery of DNA, biofuels, and vaccines.  Biotech companies are thought of as “riskier” because research and development can take time and money, producing many drugs that are never approved. 

Health Care Distributors:

Healthcare distribution is more than a delivery system. It is about getting the right medicines to the right patients at the right time, safely and efficiently. Every day, pharmaceutical distributors sustain a complex supply chain, serving as an important link in the healthcare system.

Distributors help hundreds of thousands of pharmacies, hospitals, long-term care facilities, clinics and other healthcare providers across the country keep their shelves stocked with the medications and products that patients need.

Health Care Distributors and the Supply Chain.

Health Care Equipment:

Medical equipment makers range from firms that manufacture standard, familiar products like scalpels, forceps, bandages, and gloves—to those that conduct cutting-edge research and produce expensive, hi-tech equipment, such as MRI machines and surgical robots. 

Health Care Supplies:

Medical supply wholesalers purchase medical and surgical equipment, instruments, and supplies and store items at distribution centers. Medical Suppliers deliver the products and related services to medical and dental practitioners, clinics, and hospitals.  This industry does not include pharmaceutical sales.

Health Care Technology:

Information technologies in the Health Care sector are developed to improve productivity of hospitals, clinics, and health administration services and enhance access to and quality of healthcare. Examples of technologies include healthcare information management systems, healthcare document management, healthcare business intelligence software, electronic medical records, mobile health services, and patient monitoring systems.

Life Sciences Tools and Services:

This is a very small subset in Health Care. There are only 5 companies in this sector of the S&P 500 . Life Sciences share characteristics of Biotech and Health Care Technology.

Managed Health Care :

There are three primary types of managed care organizations: Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), and Point of Service (POS) plans. PPOs are by far the most common form of managed care in the U.S.

Companies in this sector include: Anthem, Cigna, and  United Healthcare . They have insurance subsidiaries who provide medical, dental, disability, life and accident insurance and related products and services. The majority  are offered through employers and other groups (e.g. governmental and non-governmental organizations, unions, and associations). 

Pharmaceuticals:

We call them drug companies.

Pharmaceutical companies face many challenges in bringing a vaccine to market. There are laws and regulations regarding testing, safety, efficacy, marketing, and patenting. 

We are witnessing today how difficult it is to bring a vaccine to market quickly. The speed at which a potential vaccine for COVID is being developed is unprecedented . 

This brings me back to my original question. Should I buy the stocks of the potential winners in the race to develop a COVID vaccine?

I do not own Pfizer (PFE) or Moderna (MRNA) but I have been following the stocks. Over the last year the stock price of Pfizer has ranged from a low of $26.45 to $39.84.

 Moderna’s stock price has ranged from a low of $17.68 to $109.29. 

There is a significant distinction between the two companies. Moderna is 10 years old and went public 2 years ago. It is a biotech company that has not produced any commercial products , typical for a biotech growth company.

Pfizer has been in business for 171 years. Pfizer is a value stock that currently pays a dividend just above 4%.

Now the question is “how much risk do I want to take”? Moderna is clearly a “riskier” stock than Pfizer.

Are you surprised that Moderna and Pfizer are so different? 

Once you have a done a little research, it is much easier to decide what stock is suitable for you.

I’ll keep you posted on what I decide.

This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.