To be sure, select companies that develop drugs may be good investments. But an investment thesis shouldn’t be based on the science behind a COVID vaccine or any other treatment, in our view.
What Defines a Solid Healthcare Business Model?
Identifying healthcare companies with strong business models is a much better strategy. We believe that this approach leads to a far more consistent and explainable path of performance and long-term returns.
Strong healthcare businesses have similar features to good businesses in other sectors. In particular, we think high or improving returns on capital and a strong reinvestment rate signal a business advantage. When a company generates profits above its costs of capital, and reinvests those profits back into the business, our research suggests that the underlying business model typically has staying power.
Medical Themes Worth Watching
Several healthcare themes underpin solid business dynamics for healthcare companies. Improvements in diagnostics are accelerating because of advances related to human genome sequencing. Minimally invasive therapies and robotics are helping hospitals increase patient turnover and saving costs for healthcare systems. Telemedicine has received a boost during the pandemic as more patients seek to consult with doctors virtually.
Companies in these areas can provide access to promising growth potential that’s easier to forecast than a hot drug prospect. For example, Illumina is a leading supplier of instruments and reagents to sequence DNA, which is used for clinical diagnostics in areas such as oncology, and has demonstrated advantages in accuracy and cost versus competitors. Edwards Lifesciences manufactures aortic valves that can help heart patients avoid open-heart surgery-a benefit for hospitals and patients in normal times, especially during a pandemic.
For Solid Businesses, Blockbuster Drugs Are a Bonus
Some attractive healthcare companies have faced a disruption to demand as COVID-19 led to a reprioritization of medical procedures for individuals and hospitals. However, in our view, products and services that create efficiencies for patients and healthcare systems will prevail over time, especially when conditions in the industry normalize in a post-COVID world. And the business benefits created by these companies can be identified and analyzed today.
When a COVID-19 vaccine comes to market, we will welcome its success as much as anyone, hoping for a return to normalcy. But equity investors shouldn’t be distracted by headlines and dramatic stock moves of vaccine winners. Healthcare portfolios should focus on companies with long-term business advantages, and if one happens to come up with a COVID-19 vaccine or another blockbuster drug, consider that a bonus for an otherwise solid position.
