2 reasons why you should be wary of all healthcare shares

I’ve often said that the healthcare industry is my favourite industry as a whole because of its defensive characteristics and growth attributes.

It’s defensive because we place our health as the most important thing, so we’ll pay what it takes to remain alive. Healthcare isn’t cyclical, there isn’t necessarily a right time and a wrong time to buy healthcare shares.

The healthcare industry has growth attributes because of Australia’s ageing population. The older we get the more likely we need some sort of medical intervention. There are always new treatments being developed, meaning there’s another item or service that can be sold.

However, with all that in mind it’s important to note that the healthcare industry is not impervious to problems.

There are two new-ish problems for the healthcare industry that I see:

The US tech industry is coming

Shane Evans is a healthcare partner at MinterEllison, a multinational professional services business based in Australia.

The AFR recently quoted him as saying “We know that Alphabet [Google’s parent], Apple, Facebook, Amazon and Microsoft, among others, are all running internal groups where medical professionals are employed to look at opportunities in the healthcare space”.

This could be in the shape of acquisitions. Indeed, Mr Evans did say “We are likely to see peak cycle corporate activity in the global healthcare sector over the next 18 months, as companies flush with cash return to the deal-making table.”

Amazon recently entered the supermarket industry in the US by acquiring Whole Foods Market in the US. It also announced it will acquire Pillpack to disrupt the pharmacy industry.

Some Australian healthcare businesses make large profit margins that some of the FAANGs may want to take for themselves. Technology is a great growth industry, the FAANGs see healthcare as another big opportunity.

However, Mr Evans thinks Aussie businesses are safe for now: “Various barriers to entry and insufficient competition have allowed the Australian healthcare sector to maintain abnormally high margins.”

Government risk

A lot of Australia’s healthcare businesses rely on government funding either directly or indirectly. As the aged care sector has seen, the government can suddenly become stingy with funding increases which leads to problems for the profit and share price.

Japara Healthcare Ltd (ASX: JHC) and Regis Healthcare Ltd (ASX: REG) are a long way below their all-time share price highs a few years ago.

The government is not in any sort of contract to make sure that healthcare businesses make large profits and to ensure they make bigger profits as time goes on. That’s one of the main reasons why the share price performances of Ramsay Health Care Limited (ASX: RHC) and NIB Holdings Limited (ASX: NHF) have been so disappointing over the past year.

Foolish takeaway

It’s important to not let a bias to the positives of an industry mean you ignore the legitimate downsides. The healthcare industry is still very good, but I think investors should be a little more careful – particularly with the large valuations that are being applied to some shares.

One health care share that could be safe from disruption and a great growth option is this exciting business.

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Motley Fool contributor Tristan Harrison owns shares of JAPARA DEF SET and Ramsay Health Care Limited. The Motley Fool Australia has recommended NIB Holdings Limited and Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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