The latest version of the Apple Watch is unlikely to ever significantly affect the company’s profit margins, but the new health-related features do highlight an enormous investor opportunity in medical technology stocks.
A recent report from Britain’s Royal College of Nurses indicating a shortage of 40,000 nurses is only the latest sign that an aging population is stretching the capacity of developed-world health care facilities.
Domestically, British Columbia is bracing for a severe shortage of family physicians. In late 2017, Global News reported that 40 per cent of the province’s doctors were 55 or older and set to retire. Fifteen per cent of British Columbians are already without a family doctor, according to the report.
The demand for greater efficiencies is clear and technology will almost certainly be implemented to alleviate the pressure on both doctors and, for Canada, government finances. The obvious example is the spread of remote monitoring devices so doctors are aware of risk factors, such as irregular heartbeats, without patients heading to the emergency department multiple times a month.
Stephanie Demko, Citigroup’s senior analyst in the health care technology sector, sees an estimated US$70-billion in new revenue for the industry if it merely implements technology to the extent the rest of the economy already does.
In a recent report, Ms. Demko noted a mad rush for health-care technology investments by private equity firms. “Growing private equity appetite for [health care technology] is reflected in deal valuations, with respondents reporting an average EBITDA purchase price of about 12 times, the highest among the 10 health care subsectors in our survey," she wrote. “This demand is driven by high growth expectations for the sector, with nearly 80 per cent of respondents projecting [health care information technology] will outperform other health care sectors.” (EBITDA represents earnings before interest, taxes, depreciation and amortization.)
Specific stock risk remains extremely high among health care technology stocks, although there have been numerous success stories. Teladoc Health Inc., for example, which offers medical treatment to U.S. consumers by telephone and video conferencing, has appreciated by 44.4 per cent per year for the past three years. HealthEquity Inc., which helps patients manage health care expenses, has seen its stock climb 47.5 per cent annually for the past 36 months.
The Citi analyst warns that the stock is highly speculative, but Tabula Rasa Healthcare Inc. is a company that provides a good example of the drive for efficiency in the health care sector. Tabula Rasa provides medication risk management applications to help prevent adverse reactions in patients taking multiple drugs.
Ms. Demko notes that reactions to medications are the reason for 30 per cent of hospital admissions for the elderly. By reducing these hospital stays, Tabula Rasa can ease the strain on hospital staff and facilities.
Unlike most market sectors, rising demand for health care and health care efficiencies is virtually assured. The individual winners and losers are not yet clear, but it’s difficult to see any scenario where revenue growth in the industry isn’t well above the market average.
Health-care technology is a high-risk market sector in a very early developmental stage – there isn’t even a dedicated exchange-traded fund yet – so investors should not allow related stocks to make up a large portion of their portfolio. That said, a diversified, prudent approach to medical technology stocks is among the most promising investor strategies for the long term.
Scott Barlow, Globe Investor’s in-house market strategist, writes exclusively for our subscribers at Inside the Market.
Scott Barlow