Healthcare companies can be great additions to a growth portfolio – just look at the recent share price performance of industry leaders like CSL Limited (ASX: CSL) and ResMed Inc (ASX: RMD).
But if you're worried you've missed the boat on these big players, here are three smaller healthcare companies that could light up the market over the next few years.
Shares in healthcare companies can be the foundation around which you can build a successful portfolio. Because these companies tend to exhibit defensive characteristics they can help protect your portfolio in a market crash, potentially reducing the volatility of your overall returns.
This is due to the social need healthcare companies provide. In an economic downturn, people will tend to reduce their spending on discretionary or luxury items long before they cut back on the amounts they spend on healthcare, meaning that these companies tend to remain profitable even at times when other companies are fighting to stay afloat.
But the healthcare sector also offers unique growth opportunities. Because of the amount of technology, R&D and specialised knowledge and science that goes into developing medical products and services, the healthcare industry often presents stiff barriers to new competitors trying to enter the market.
Plus, the products and services offered by healthcare companies are generally highly differentiated – reducing the need for companies to compete with one another based solely on price. This essentially means that a company with an innovative new medical product or service, provided it has the cash available to develop and market it, can quickly become profitable.
Just look at the performance of the big industry players over the last 12 months. The share price of CSL is up over 50%, ResMed Inc is up by almost the same amount, and Cochlear Limited (ASX: COH) has increased over 30%.
Of course, this doesn't mean that every healthcare company is going to be a big success – plenty fail through lack of financing, advances in competing technologies, or poor clinical trial results.
But here are three smaller companies that might be worth the risk.
Starpharma Holdings Limited (ASX: SPL)
Starpharma is an Australian pharmaceutical company based out of Melbourne. The company specialises in a type of nanotechnology called dendrimers, which are man made synthetic compounds that have the ability to enhance existing pharmaceuticals or create entirely new products.
Currently, Starpharma has two key product offerings: a women's health product called VivaGel which treats bacterial imbalances, and a drug delivery platform which aims to improve the efficacy of certain medicines.
The company has been in the news recently as it entered into a licensing agreement with global pharmaceutical company Mundipharma. As part of the agreement, Mundipharma will market and sell VivaGel in 43 countries across Europe and Latin America.
Impedimed Limited (ASX: IPD)
Another Australian healthcare company worth looking into is Impedimed. It develops technology that can measure various properties about a patient's fluid levels and body composition, which can then be used in the diagnosis and treatment of serious conditions including lymphedema and heart disease.
This company is a higher risk investment as its products still appear to be in the trial and testing phase, and total revenues for the most recent quarter ended June 30 were only $1.4 million. However, in a recent investor presentation, Impedimed stated the addressable market for its products in the US is more than US$2.8 billion annually.
Plus, the company is also following a subscription-based business model, which is attractive for investors as it locks in recurring revenues and reduces risk.
Virtus Health Ltd (ASX: VRT)
Virtus specialises in assisted reproductive services, and is the largest provider of in-vitro fertilisation services in Australia. It is also the market leader in Ireland.
Just last week Virtus announced that it had acquired Danish fertility clinic Trianglen, signalling that it is keen to expand its footprint in Europe. The maximum consideration paid for the purchase, which depends on Trianglen meeting certain EBITDA targets set out in an earn-out agreement, is $43 million. It is forecast that the acquisition will increase Virtus' earnings per share by FY19.
Foolish takeaway
Not every healthcare or pharmaceutical company is going to be the next CSL Limited. But the three companies mentioned here are still great additions to your watch lists. While they still might be risky investments right now, they all have the potential to deliver real growth in the future.
