With the rise in disposable income and changing lifestyle of individuals, demand for proper healthcare facilities has increased drastically thus a lot of scope of development and growth can be seen in the industry. Need of proper infrastructure in the healthcare industry has been one of the major pre-requisite and thus the amount of investment needed for development and expansion of the industry is huge. In the last decade with the rise in private participation seen in the industry particularly in the emerging markets, a lot of change in the financial policy has been seen like the mergers, acquisition and private equity activity has been increasing considerably.

Healthcare Industry in USA

Healthcare is one of the most stable sectors, given the inherent nature of businesses. During recession expensive surgeries saw a decline though the medication was more or less stable. Many pharmaceutical companies lost revenues due to the decreasing price of medicines. US Government has always been supporting the Healthcare Industry by providing share in the budget meant for the development of the industry.

USA is and will be the largest Healthcare market and thus has been the most important industries. It is needless to say that despite random development taking place in the industry a lot more needs to be done. Thus one of the major costs incurred by Health Care Industry is the Innovation and R&D expense.

R&D Expense in Healthcare

R&D expense leads to the development of the products and improves on the healthcare facilities. Increase in R&D investment along with the introduction of highly sophisticated supply chain system and product delivery mechanism has been witnessed in the industry. With the immense potential seen in the industry, the healthcare industry has been rising on the investments including those of capital investment (like purchase of property, equipment and infrastructural materials). The gloomy years of 2008 saw a declining trend in the acquisition, owing to the liquidity crunch and unavailability of credit financing. Also a decline in the capital expenditure was seen during these years for obvious reasons of low availability of cash.

Healthcare Industry is an inherently cash rich industry and thus the Companies in healthcare sector regularly go for share repurchase and dividends. The repurchase was on a high spree during the 2008 and 2009 period, so as to support the share prices and reward the shareholders in times of global financial crisis.

With the federal deficit remaining near to $1 trillion mark, pressure mounting over the healthcare industry could be seen. This pressure could result in somewhat decreasing performance and revenue growth for the industry could be seen declining. Investment grade companies are using cash for shareholders reward, to improve/sustain on their respectability. Owing to less availability of debt, companies are seen improving on their leverage ratio thus enhancing on the liquidity profile. With the changing patter on consumer spending, volatility is seen in the industry thus dampening the demand of the services in many cases.

Also Read on GWI Why and Where to invest in India’s Healthcare Industry.

Risks Faced by US Pharma Companies

Following are the major risks factors which affects the performance of the company in Healthcare Sector.

1. Pressures & Regulations – Pricing Pressures, Government Regulation and Managed Care Trends
2. Generic Competition – Competition from manufacturers of generic drugs is a major challenge. Upon the expiration or loss of patent protection, companies can lose the major portion of sales of that product in a very short period, which can adversely affect its business.
3. Research and Development Investment – The discovery and development of safe, effective new products and the development of additional uses for existing products are very important for a company’s success. Growth potential of a company depends largely on its ability to identify and develop new products or new indications for existing products that address unmet medical needs.
4. Patent Protection – Long-term success largely depends on company’s ability to market technologically competitive products. If companies fail to obtain and maintain adequate intellectual property protection, they may not be able to prevent third parties from using proprietary technologies.

Conclusion

For investment grade companies, a fall in capital expenditure and acquisition was seen across all the subsectors. Also share repurchase decreased during 2008, except for companies operating in healthcare services, which raised their acquisition so as to diversify on the service provided. A gradual rise in Capex, acquisition, share repurchase and dividend was seen after 2009 when the macroeconomic factors started improving giving positive signs of recovery. In speculative grade companies, a fall in acquisition, Capex was observed for the gloomy years of 2008, post which improvement was seen. Likewise except pharmaceutical companies, a decrease in share repurchases and dividend was also observed. Post 2009, with the support of the economy and improving market sentiments, companies began growing and started with shareholder rewards as well which led to increase of acquisition, Capex, dividend and share repurchase.

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