There is an old saying that gets repeated like a broken old record that healthcare-related stocks are defensive in nature and are recession proof. This is mainly because of (i) the aging population which leads to more demand for medical services or medical drugs as well as (ii) inelastic demand as in if one falls sick, one will still need to visit a doctor for treatment regardless of whether the state of the economy is good or in the doldrums.
I think that the above beliefs are mere fallacies. I have always subscribed to the belief that what the eyes can see is real and what the ears can hear are illusionary. I think that the defensive nature for a lot of medical stocks in our healthcare industry is over-rated. Yes, true for some companies but not factual for a lot of others. Amgen, the drug making company for cancer, amenia and other drugs that are essential to many consumers is a perfect example of a healthcare business that is indispensable. It actually managed to grow its revenue by 3% in 2008 during the global financial crisis.
However, for other healthcare stocks based in Singapore, they have been hit by the softening of medical tourists due to the intense regional competition. Hospitals and specialist clinics in Malaysia and Thailand are catching up in terms of their quality and can offer them at a much lower cost relative to Singapore. Traditional clients from Indonesia have also been dwindling. We have seen Raffles Medical and Parkway Pantai (IHH) venturing overseas to market the SG local brand in overseas setup.
To illustrate the illustration of so-called resilient earnings from medical care stocks, Sing Medical Group in 2012/2013 had been hit hard by dwindling medical tourism and the whole group was in the red. Only when their new executive CEO took over and started executing restructuring plans and new growth business strategies did it eventually turned around and back to profitability.
Please also see “The Enigmatic Case of Sing Medical Group- More Money Earned Lead to Lower Share Price.”
Another example would be the case of FIRST Reit which owns hospitals in Indonesia. Recently, its unit price plummeted 25% to 30% due to high concentration risk of its largest debtor, Lippo Karawachi and also expectation that once the first batch of expired lease coming up for renewal in 2021 will be on unfavorable terms such as pegging rental payment to Indonesian rupiah. This is despite the case that there is still no major deterioration in its actual financial performance. However, the market has already priced in the future earnings negatively and repriced the current fair valuation of the REIT. Resiliency in earnings for healthcare-related businesses should thus not be taken for granted.
For the reasons above, while healthcare businesses offer good portfolio diversification, it is a misconception that the earnings are absolutely resilient. The healthcare stocks listed in Singapore are not public hospitals hence I have trouble seeing and linking the services provided as inelastic demand. The weightage of having a good senior management team as well as identifying the customer segment to grow the business is thus vital for the healthcare stocks to continue to grow and do well. This is no different from other industries.