For all drug manufacturers (large, generic, or specialty), biotech, diagnostics, and research companies, most of their budgets go into research and development. You need to manage your new product pipeline and your patents. A company can potentially surf its past achievements for a decade as its patents protect research. However, they need to constantly renew their portfolios. This often affects their ability to increase their dividends in predictable ways. Both upward and downward price volatility is also a common characteristic of companies in this industry.

For health plans, long-term care facilities, medical care providers, and distributors are more likely to be affected by government regulations. Health care costs are a major issue for governments around the world. Should it be free, sponsored, or insured? This question leads to much debate and uncertainty about the future. Regardless of what happens, the industry will find a way to adapt its business models, but volatility will be the lingering and lingering characteristic of this sector.

Subsectors (industries)

Greatest strengths

The advantage for dividend investors in this sector is the wide range of large and well-established companies. The best performing companies in this sector are often long-term companies with a strong distribution network or a large drug portfolio and pipelines full of new products. Large drugs usually offer a safe haven for your money in the long run. They know how to manage their R&D budgets and drug pipelines. The health sector often sees inventory spikes up and down as a result of the results of its discoveries. Patents and regulations are part of the daily routine.

Medical devices, instruments, or suppliers offer products with repeat purchases. They enjoy broad sales networks, loyal customers and constant repeat orders. They can also be great dividend producers.

Biggest weaknesses

Unfortunately, since R&D budgets are often a large part of a healthcare company’s spending, there are many companies that have an erratic track record of dividend growth. It’s not that they’re going to cut their dividend, but you might wait a few years before seeing a dividend increase.

When you look at the health insurance and medical distribution industries, they face fierce competition and have to operate in a razor-thin-margin environment. If they make a bad acquisition or hit a speed bump, these companies’ cash flow will quickly evaporate. There are currently many changes in the air regarding health regulations. There is a political will to make healthcare more affordable. This could have an impact on these industries.

Finally, medical care institutions have had some problems in the past. With the pandemic, it has become quite a challenge to cope with the cost hike (to ensure that both employees and seniors are safe) and weaker occupancy rates. Proceed with caution.

How to make the most of it

Large drugs are often associated with massive price fluctuations. A patent expires, news of a new drug or major acquisition could add to Mr. Market’s mood swings. In these situations, you have the option of choosing a solid dividend producer at a discounted price. I picked up shares in Johnson & Johnson (JNJ) during their quality control issues in 2012-2013 and benefited greatly from this move.

In general, the healthcare industry is capital intensive or requires a significant size to operate efficiently. Make sure that the debt burden of your chosen company is not too great to manage efficiently. For sales and health plans, take a close look at margins over time.

The health sector is usually ignored during bull markets. There are more exciting companies to buy, which translates into a great buying opportunity. Most importantly, you should be patient with healthcare companies. It can take the market some time to realize the value inherent in a particular company’s stock.

The healthcare sector is best suited for high-income investors.

Favorite selection

AbbVie (ABBV)

  • Market Capitalization: 188B
  • Yield: 5.00%
Source: AbbVie website

Business model

AbbVie is a pharmaceutical company with strong exposure to the immunology and oncology markets. The company’s top drug, Humira, accounts for more than half of the company’s current bottom line. With the Humira patent imminent, the company is looking to other drugs like Imbruvica and Venclexta to become more important growth vectors. The company was spun off from Abbott in early 2013. The recently announced acquisition of Allergan will add several new aesthetic and women’s health drugs. A legal department with strong expertise in patents and trademarks will also be added.

Investment thesis

ABBV’s strength lies in Humira, a tumor necrosis factor blocker that reduces the effects of an inflammatory substance in the body. Humira accounts for about 50% of ABBV sales and even more of its profits. The company is currently enjoying the past several years of various Humira patents around the world. New immunological drugs like Skyrizi and Rinvoq could replace much of Humira’s sales slowdown. ABBV’s growth also lies in its new cancer drug Imbruvica. We are also seeing promising growth in drugs for psoriasis and rheumatoid arthritis. The idea behind buying Allergan was largely to diversify ABBV’s revenue streams and find smarter ways to expand its patents. AGN’s legal department, like ABBV’s, is known for its “creativity”. Getting a botox brand out was very smart. The latest dividend increase confirms our bullish thesis.

LeMaitre Vascular (LMAT)

  • Market Capitalization: 188B
  • Yield: 0.80%
Source: LeMaitre Vascular website

Business model

LeMaitre Vascular Inc. manufactures and markets medical devices for the treatment of peripheral vascular diseases. Its products are mainly used during open vascular surgery and target various anatomical areas such as the carotid, lower extremities, upper extremities, and aorta. The company’s lower extremity line of products is the largest contributor to sales, followed by the Carotid line. LeMaitre surgical devices include angioscopes, balloon catheters, carotid shunts, phlebectomy devices, vascular grafts, vascular plasters, and vascular occlusion systems. LeMaitre generates most of its sales in the USA. Sales in Germany also make a significant contribution to total sales.

Investment thesis

When we look at LeMaitre Vascular, the first word that comes to mind is “growth”. The company has seen strong revenue growth as it has acquired 24 companies over the past 23 years. LMAT also relies on a solid sales and engineering department to sell and develop new products. The company currently offers over a dozen products for surgery on veins and arteries outside the heart. The pandemic has slowed that growth vector (from 110 to 79 sales reps this year), but you can expect more reps between 2021 and 2022 as vaccines are spread around the world and surgical events increase.

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