Health Care Stocks: "90% Confusion And 10% Opportunity"

Choosing the right health care stocks;

Tweet

If you think your business has been buffeted by the winds of change, consider what is happening in the health care industry:

* New technological developments are turning up faster than in any other field, except possibly computers. They run the gamut from futuristic gene-splicing techniques -- still mostly in experimental stages -- to sophisticated diagnostic and therapeutic equipment.

* Health services are being delivered in new ways, often by new companies. Some 150 young, health-related companies went public in the last year and a half along. About a quarter of these are firms that operate freestanding health care centers -- medical, optical, dental, and so on. "That's up from zero a few years ago," points out Jules Marx, an industry specialist with Whale Securities Inc., based in New York City.

* The federal government -- which picks up the tab for 30% of the nation's total health bill -- has recently instituted a series of cost-cutting policies that fundamentally change the economics of the business. The Medicare system, for instance, has established standard treatment costs for 468 "diagnostic-related groups" (DRGs) of illnesses and disorders. If a hospital's costs for treating a patient with a given illness are above the DRG average, Medicare won't pay the overrun. If the costs are below the average, though, the hospital gets to keep the difference. The implication: There is a new emphasis on cost containment, efficient operation, and less-expensive technology.

All of this is quite a change from the system of the past 10 years, when health care delivery was dominated by big non-profit hospitals with about as much interest in cost cutting as in yesterday's newspaper. And the changes undoubtedly open up investment opportunities. The difficulty lies in figuring out where the openings might be.

"Right now," says Paul W. Brown, a medical devices analyst with Hambrecht & Quist Inc., in San Francisco, "I'd say there is 90% confusion and 10% opportunity. In a year, that ratio should change to 70% confusion and 30% opportunity." Meanwhile, says Brown, investors would do well to study how various kinds of companies have done in hhe recent past, and what trends and pressures they will be facing in the future.

Service companies. Some 40% of all health care expenditures go to cover hospital costs, and big for-profit hospital chains, such as Humana Inc., are growing at rates as high as 25% a year. With the advent of cost containment, both they and the nonprofits are likely customers for companies offering hospital information systems. The top two companies in this field, says Bama Rucker, another Hambrecht & Quist analyst, are Shared Medical Systems Corp. and HBO & Co. Shared Medical reported 1984 sales figures of $256.8 million, while HBO came in at $88.7 million. Among their strong points, Rucker says, "both have a national sales force, a large hospital client base, and the money for R&D."

Much of the growth in health care services is taking place outside of hospitals. Health maintenance organizations (HMOs), for example, now number some 340, up from a mere 30 only 15 years ago, and such big publicly owned chains as Maxicare, U.S. Health Care Systems, and HealthAmerica are all well over $100 million in revenues. But analysts tend to agree that HMO stocks, which soared in 1984, aren't bargains in 1985. Of greater potential interest to investors are the smaller, newer companies that operate a variety of installations. Jim Hoover, who tracks health care stocks for Robertson, Colman & Stephens in New York City, likes Mediplex, a Massachusetts company that operates eight nursing homes, three alcohol- and substance-abuse centers, and a building-development division. Mediplex went public in the fall of 1983 at 15; in February the stock was over 29.

Medical equipment. "Hospitals are not just cutting back on diagnostic machinery," says William J. Hayes, portfolio manager of Fidelity Investments' Select Health Care Fund, "but on everything from bedpans to needles." In such an atmosphere, investing in a company that manufactures expensive new equipment can be a chancy proposition. By the same token, though, new technologies that promise to shorten hospital stays or otherwise reduce costs are good bets for the future.

Lasers, says Whale Securities' Marx, are an example of a technology that fits in the latter categor. Lasers are already well established in ophthalmology, and are just beginning to make headway in other areas. A company called Lasermed Inc., for instance, produces laser-based surgical equipment for physicians' offices, taking the technology out of the hospital entirely. The company is likely to turn a profit this year, Marx believes.

Another set of companies that may benefit from he current climate are those in the growing market for home health care. Two of the major players are Baxter-Travenol Home Therapy Group and Home Health Care of America Inc., which is the one pure play in this field. Both companies hold a 15% to 18% share of the home infusion-therapy market; that is, the market for home-based infusion of nutrients, antibiotics, or toxic chemicals for use in chemotherapy.

 1 | 2  NEXT