Health care companies are often highly profitable, with strong free cash flow and returns on capital. Health care has also benefited from powerful growth trends. Health care firms benefit from consistent demand, as well.
Health care sector includes
- drug companies,
- biotechs,
- medical device firms and
- health care service organizations.
Of all these areas, drug companies and medical devices firms are usually the most promising because they typically have the widest economic moats. However, investors often get swept away by these companies’ heady growth rates, so valuations can be steep.
Economic moats in health care.
Health care companies often benefit from economic moats in the form of high start-up costs, patent protection, significant product differentiation, and economies of scale. This makes it tough for new players to enter the market, particularly for drug companies with valuable patent rights, managed care organizations with large provider networks, or medical device firms with long clinical track records. These characteristics make for great profitability: The market-weighted return on equity for health care firms has averaged 23 percent over the last 5 years, despite the economic recession.
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