Healthcare stocks have performed well over the last decade – but the next decade may belong more specifically to healthcare technology stocks. These are the companies attempting to disrupt the entire healthcare industry using technology in various ways.
In this post we explore the types of companies revolutionizing the way healthcare is delivered. We also highlight ten companies improving efficiencies and reducing costs for the industry.
- How technology is changing healthcare
- Overview of healthcare technology stocks
- Investing in healthcare technology stocks
How technology is changing healthcare
The past decade has been particularly good for the large healthcare companies from pharmaceutical giants to insurers. But healthcare, particularly in the US, remains expensive. There has been endless debate about the best way to pay for healthcare – while neither alternative reduces these costs. Ultimately, it’s taxpayers that pay for healthcare, whether its via insurance premiums or taxes.
Software can be used to reduce costs by improving the flow and availability of information. Video, voice, and apps can often be used in place of in person consultations. This reduces the amount of physical space needed and saves time. Emerging technologies are also being used to conduct non-invasive, or minimally invasive surgeries. These surgeries often eliminate the need for overnight stays in hospital. Technology can also be used for preventative healthcare, early diagnosis, and monitoring. These are all activities that reduce or eliminate the need for costly procedures at a later stage.
The field of medical research also stands to benefit from effective sharing of data. Machine learning can also be used to gain valuable insights from data. The field of genomic research already leverages the power of artificial intelligence extensively. These are just some of the ways that technology is being used to improve the effectiveness of the healthcare industry while reducing the costs at the same time. The convergence of healthcare and technology is evolving into an exciting investment theme in fact it may become one the investment megatrends of the next decade.
Healthcare Technology Stocks
For the purposes of this article, we are dividing these companies into three categories: telemedicine, software, and medical devices.
Telemedicine platforms deliver health related services using a combination of telephone, video, websites, and smartphone apps. Not only do they eliminate the limitations of physical distance, but the entire process is streamlined too. Telehealth platforms can reduce the cost and time for consumers seeking healthcare. They also allow healthcare providers to help more patients, regardless of their location.
The concept behind telemedicine is not new. In fact, some attempts at delivering healthcare by phone predate the internet. But telehealth has only begun to gain widespread adoption recently. This probably has a lot to do with consumers becoming more comfortable interacting with apps and software in other industries. The software industry has also learnt to create a better user experience for users of digital services.
The COVID-19 pandemic caused a lot of technology led trends that were already in place to accelerate. Millions of people who were reluctant to use telehealth services before the pandemic, are now perfectly comfortable doing so. They have also seen the cost saving benefits.
- Teladoc Health Inc. (NYSE: TDOC) – Teladoc Health is probably the most well-known of the healthcare technology stocks. The telehealth platform was founded in 2002 but has only gained real traction more recently. The platform offers on-demand remote medical care from inhouse doctors and a network of 55,000 specialists. Teladoc Health now has a global presence thanks to a series of acquisitions over the last few years. In 2020 Teladoc acquired Livongo Health for $18.5 billion. Livongo helps people manage diseases, particularly diabetes. The deal makes Teladoc Health a leader in this field. It has taken Teladoc Health a long time to get to where it is, but the platform is now well established with annual revenues of $1 billion. Increasingly, healthcare insurers like United Health are covering consultations on the platform, and Teladoc Health now has over 50 million paying members in the US. In 2020, revenue growth accelerated from 40% to over 140%. The share price rose as much as 75% but has given up all those gains in recent weeks. It’s now trading on a price to sales ratio of 28, with a market capitalization of $31 billion.
- American Wellness Corporation (NYSE: AMWL) – One of the healthcare technology stocks that has recently held its IPO is Amwell. The company helps patients and doctors connect and communicate using a secure video connection. Amwell has also launched Hospital TV 100, which hospitals can use to convert existing televisions to telehealth endpoints. This means hospitals can use its television screens to communicate with patients. Over 55,000 providers joined the company’s telehealth platform during the first 6 months of the COVID-19 pandemic. This was a 930% increase from a year earlier. In the third quarter, Amwell facilitated 1.4 million consultations. With a market cap of $5.4 billion, Amwell is much smaller than Teledoc and therefore has more room for growth. The stock price has also fallen 50% from its January high, and is back at the price it began trading in September. However, the company needs to improve its efficiencies. The gross margin has fallen while it should be rising as economies of scale are realized. So, you may want to look for improving financials before investing.
Healthcare software stocks
Software is being used to disrupt most industries – and that includes healthcare. In particular, software can be used to improve the accessibility and usability of data. But it can also be used to improve any tasks associated with the operations of a healthcare company.
- Veeva Systems Inc. (NYSE: VEEV) – Veeva systems is the most valuable of the healthcare technology stocks. The company provides cloud-based services to the entire life science industry. In particular the software helps companies manage regulatory processes, data, and customer relationships. Veeva is similar to the SaaS company, Salesforce, but with a focus on the healthcare industry. Veeva has over 850 customers, including many of the pharmaceutical giants. More than 75% of its revenue is subscription based, which has resulted in stable revenue growth over time. Veeva’s margins are also particularly good. The gross margin is 72% and the operating margin is 22%. As is the case with most healthcare technology stocks, the valuation is high, despite a 20% price decline in the last two months. Nevertheless, it is one of the more predictable stocks in the space.
- Sema4 / CM Life Sciences (Nasdaq: CMLF) – Sema4 will soon be listed when it merges with the CM Life Sciences SPAC. Sema4 is described as a “patient-centered genomic and clinical data insight platform company”. In simpler terms, it’s a database for patient data, and the platform uses artificial intelligence to generate insights from the data. The platform already has genomic profiles and de-identified clinical records for 10 million patients. Sema4 earned $190 million in revenue in 2020 with a revenue growth rate of 38%. The SPAC and another funding round raised $793 million and will value Sema4 at $2 billion. At this stage Sema4 is still one of the more speculative healthcare technology stocks. However, the company is operating in a space with vast potential to revolutionize medical research and patient diagnosis.
- GoodRx Holdings (Nasdaq: GDRX) – GoodRx runs a prescription drug price comparison website in the US. The prices of prescription drugs varies considerably from one pharmacy to the next. In many cases, mail order pharmacies can be considerably cheaper too. GoodRx has shown that its customers can save as much as 70%. Customers receive coupons on the platform, which they take to pharmacies to receive a discount. The pharmacies then pay a commission to GoodRx for referring customers to them. The company was only founded in 2015 but is already profitable. Its margins are also remarkably high, though revenue growth is slowing quite quickly. This is a good business – but is risky for investors because the barriers to entry are much lower than they are for other healthcare technology stocks. Nevertheless, their first mover advantage should give them an edge in the medium term.
- Illumina Inc. (Nasdaq: ILMN) – Illumina, Inc. operates in the genetic and genomic analysis space. The company provides instruments used for genetic analysis and genotyping and sequencing services. Revenue growth has been patchy – but the company is profitable and has an operating margin of 18%. Illumina already has close to 80% market share, so future growth is dependent on the market itself growing. Genomic analysis has a growing number of applications. It is widely expected to play an important role in the future of research, diagnosis, and preventative medicine. So, while Illumina’s revenue growth is still fairly slow, its worth keeping an eye on this company.
Other software companies
Tech giants Apple and Microsoft are two companies that are also making big investments in the healthcare industry. Beside all the healthcare apps running on iPhones, Apple’s devices are becoming increasingly useful to the healthcare industry. Both the iPhone and Apple Watch can be used to monitor health indicators. Apple is also partnering with a long list of healthcare companies to develop devices that integrate with Apple devices and software.
Meanwhile Microsoft has also partnered with healthcare providers to create software with applications throughout the industry. In addition, the company launched Microsoft Cloud for Healthcare, a cloud environment for the industry. Microsoft has also backed several projects finding new ways to use artificial intelligence for medical research. Some of the biggest gains in the industry are likely to be made by Microsoft and Apple. However, these are exceptionally large companies, and it will be sometime before the impact on the bottom line is felt.
Some of China’s tech giants are also investing in the healthcare industry – particularly in telehealth. Alibaba Health IT Ltd (US OTC: ALBHF) was spun out of Alibaba in 2018. The company is actually a holding company with stakes in several companies engaged in telemedicine and ecommerce.
JD Health International (US OTC: JDHIF) listed in is a subsidiary of JD.com that held an IPO in China in December. JD Health is primarily a telehealth company which operates via an app. As of June 2020, it had 72 million users.
China’s insurance giant Ping An has also launched a telemedicine app. The company, Ping An Good Doctor (Hong Kong: 1833) also listed in 2018. The platform has 67 million active users. In addition to the app, patients can use mobile kiosks to consult with physicians.
Medical device companies
Healthcare is also being revolutionized by companies using cutting edge technology to monitor patients and perform procedures. Most of these companies fall within the medical devices industry. There are 120 stocks listed in this space. But the companies to really pay attention too are those that use technology to improve outcomes and or reduce costs.
- Abbott Laboratories (NYSE: ABT) – The giant in the medical devices industry with a market value of $211 billion is Abbott Laboratories. Abbott manufactures a large portfolio of medical devices, diagnostic equipment, pharmaceuticals, and nutrition supplements. Despite its size, Abbott is still growing revenue at over 20% a year. Abbott has also demonstrated an ability to keep innovating. Recently it received FDA (Food and drug administration) approval for a glucose monitoring system. The system transmits blood sugar data every minute and sends alerts when blood sugar is too high or low. Abbott may not offer the highest returns amongst healthcare technology stocks but it’s probably the safest play in the industry.
- Intuitive Surgical (Nasdaq: ISRG) – Intuitive Surgical is the leader in the robotic surgical systems market. In 2000 the company pioneered the field of minimally invasive surgical procedures with the da Vinci surgical system. The company also manufactures a large portfolio of other instruments and systems used in operating theatres. Revenue growth accelerated between 2015 and 2019 but dropped in 2020 when most elective surgeries were postponed. However, the share price has still rallied over the past few months in anticipation of business normalizing. The stock price has probably run too hard as the valuation is extremely high. However, it’s a very profitable company, with an operating margin of 24%, and will at some point offer an opportunity to patient investors.
- Inmode (Nasdaq: INMD) – Inmode is an Israeli company that manufactures radiofrequency devices used for minimally invasive and cosmetic surgery. This is small cap stock with impressive fundamentals. The company was negatively affected by the pandemic in 2020, but investors are already looking to the future. At the end of 2019, revenue was growing at 63%. Growth ground to a halt in the first half of 2020 but was already recovering by the end of the year. The company also has an impressive operating margin of 35%. Inmode Ltd is trading on a forward PE of 26, which is reasonable for the industry. The company is also buying back its own shares, which should add support to the share price.
- ShockWave Medical Inc. (Nasdaq: SWAV) – Shockwave Medical manufactures devices that use shockwaves to break-up kidney stones and unblock clogged arteries. The company recently received FDA approval for its artery treatment (which was approved in Europe in 2018). This will make Shockwave the only company in the world able to perform this procedure. Although growth has slowed considerably over the last 18 months, revenues are still growing at over 50%. Shockwave is growing quickly, but it’s also a small cap stock trading on a high valuation. As such it should be treated as speculative, and volatility should be expected.
Investing in healthcare technology stocks
The world currently spends around $8.3 trillion a year on healthcare. So, the total addressable market is massive, and healthcare technology stocks only account for a tiny fraction of that spending. There is a long way to go, and new opportunities will arise over time. It’s worth considering that some of the best multibagger stocks in the space may not be listed yet. In fact, some may not even exist yet.
As is often the case with growth stocks, when a new trend emerges, valuations become stretched. Investors with patience often get to buy the same stocks at lower prices later. When it comes to stock picking, it will probably pay to be selective. There is a difference between a compelling story and a profitable business model. Investors should always look for evidence that the business can actually make money, rather than promises of what may happen.
Conclusion: Disrupting the healthcare industry
The high cost of healthcare means disrupting the healthcare service industry is essential. It will also be very lucrative. Healthcare technology stocks and marijuana stocks will probably be the big beneficiaries of this disruption. However, it’s still worth being selective and focusing on stocks with a profitable business model rather than a good story.