The document discusses the healthcare sector as an investment opportunity. It notes that healthcare demand is defensive as people will still need it even during economic downturns. It identifies top industry players as drug companies, biotech companies, and medical device companies. Drug companies and device firms tend to have strong competitive advantages or "wide economic moats" due to high costs of research and development, patent protection, and other barriers to entry. However, the sector also carries risks such as long development timelines for drugs, regulatory hurdles, and loss of revenue when patents expire. The document provides an overview of factors to consider when evaluating investment opportunities in healthcare companies.

2.  Healthcare is that area of economy which is
linked directly to human survival. The vital
importance gives this sector the potential for
above average financial gains.
 Healthcare benefits from consistent demand
even when the economy is in the tank, people
will need healthcare. That’s why it is
considered a defensive sector.
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3.  Drug companies
 Biotech companies
 Medical devices
 Healthcare service organizations
Drug companies and Medical devices firms
usually have wide economic moat.
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4.  High start up cost
 Patent protection
 Significant product differentiation
 Economies of scale
 Developing a single drug can take 15 to 20
years and can cost hundreds of millions.
Large sales force and big distribution network
is also required. This prevents entry of new
players
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5.  Wide moats
 Higher return on invested capital 15-30%
 High gross profit margins up to 80%
 Higher operating margins 25-35%
 Good free cash flow
 Clean balance sheet.
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6.  Only one third drugs ever return cost of
development.
 Drugs takes years and sometimes decade to
develop.
 Companies have to pump money into the
research process with no guarantee of a
return.
 Government can force to reduce the prices.
 Regulatory issues.
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8.  Some molecular compounds are developed
which can potentially stop or reverse the
effect of a disease
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9.  Testing in done on animals. The
objective is to evaluate potential toxic
effects.
 Before a drug gets anywhere near a
human, scientists tries to understand
the possible damage it could do.
 This phase takes 2-3 years
 On successful testing companies can
file Investigational new drug(IND)
application to FDA
 Around 85% INDs move on to Phase I
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10.  Drug is tested in a small group( less than
100) of healthy humans.
 Objective is to gather initial data on safety
and efficacy
 Scientist and physicians evaluate the body's
reaction to the drug.
 Only 20% drugs can clear phase I
 Cost of this phase is in millions.
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11.  Drug is tested on a large population(300-
500) on patients afflicted with targeted
disease.
 Physicians and Scientists tests how much and
how often to give to patients.
 The possible side effects and additional data
on safety is collected.
 Cost around 5 million
 Only 50% can pass phase II trail
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12.  Drug is tested on a large population(5000+)
on patients afflicted with targeted disease.
 Focus is on long term patient safety
 60% can pass phase III trail
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13.  On clearing the phase III company can file new
drug application(NDA) to FDA or other regulatory
of the world.
 FDA takes up to 18 months to review the
application
 Chances of success 70%
 The drug goes back to the drawing board on
rejection . Another filing probably takes years
and millions more. Company can also scrap the
project.
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14.  Once drug gets FDA nod, the marketing can
begin.
 Company gets patent for 20 year.
 Because a patent application is usually filed
as soon as a drug is identified and not when
it hits the market, drugs rarely enjoys 20
years monopoly.
 Drugs generally enjoy only 8-10 years of
patent protection
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15.  After a drug goes off patent, other companies
can make generic drugs.
 Generic drugs have the same chemical
composition but cost less 40-60% less.
 Generic drug makers don't have to spend on
R&D, so the price is low.
 Branded drug makers loose 60-80% revenue
in 6 months on the entry of generic drug
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16.  If you are considering buying shares in a drug
company that depends on a specific drug for
a significant percentage of its sales, don't rely
on the money continuing to come in after the
patent expires.
 A firm cant easily replace the patent expiring
drug which generates big share of revenue.
Pfizer generated 13 billion from Lipitor in
2010. Patent expired in 2011 and Lipitor
sales went down to 5 billion in just 9 months.
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17.  Blockbuster drugs in portfolio which generates sales in
billions
 Patent protection to keep the competitors away. New
generation of drugs for the new patents to compensate the
loss of patent expiring drugs
 A good pipeline of drugs in clinical trials Larger the
population of those drugs serve, such as cancer, arthritis
the better.
 Strong sales and marketing network because physicians
rely on companies sales people to learn about new
products.
 Big market potential drugs for the treatment of conditions
affecting a large age of population.
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18.  They are copycat companies have gross
margins in 40-50% range
 Operating margins 15-20%
 Return on invested capital around 10%
 Faces competition
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19.  The first company to file a legitimate patent
challenge against a branded drug enjoys 180
days of marketing exclusivity. This allows the
company to cash in before others joins the game.
 After others join the only the low cost
manufacturer can be a leader. Its always good to
stay with established player in generic drugs.
 Governments across the world are favouring
generic companies to lower health care costs.
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20.  Biotech companies discover new drug using
biologic cellular and molecular processes
rather than chemical processes.
 Very few companies are successful in
developing new therapies. There is
uncertainty to the drug development process.
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21.  There are two main types of device firms
cardiovascular and orthopaedic.
 The aging population and increase in life
expectancy drive sales growth in medical
devices.
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22.  Device companies typically have wide
economic moats.
 Economies of scale
 High switching costs
 Long term clinical histories
 Patent protection
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23.  Switching costs tend to be high for
orthopaedic devices because physicians often
reluctant to drop one firm's devices in favour
of another. As installation of implant is a
complicated process that requires specialized
tools and training. Each makes implants with
different installation procedure. Surgeons
avoid investing in training of new device
unless it offers something very great.
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24.  Device firms have less risk than pharma
companies as products improvement is
evolutionary rather than revolutionary. There
is less regulatory risk.
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25.  Companies have to invest heavily on R&D.
Switching cost in cardiac devices is low. The
implantation procedure for a cardiac device is
largely the same this makes it easy for
surgeons to switch to new product quickly.
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26.  Drug development is time consuming, costly and there are no
guarantees of success. Prefer companies with long patent life
and strong pipeline.
 Companies whose products target large patient populations are
better.
 Have big margin of safety in companies whose majority revenue
comes from few drugs.
 Healthcare companies have to spend a big amount of R&D make
sure the firm have enough cash or cash from operations.
 Keep an eye on the government. Any drastic policy changes can
have a deep impact on revenues.
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27. API Formulation Drug
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28. API(Active Pharma ingredient) or Bulk Drug
API is the active part of the drug it is the
substance responsible for the product being a
medicine. When the bulk drug is absent, the
product is no longer a medicine and when it is
changed, it is a new medicine.
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29.  Formulation is inactive part of the drug, change
of inactive ingredients don't impact the curative
quality of the product in most of the cases. This
means the drug manufacturers more or less have
the liberty to "formulate" the bulk drug using
excipents of his choice depending on chemical
feasibility and commercial interests. The
medicines in the markets in the "form" of tablets,
capsules, syrups, drops, intravenous fluids etc.,
are therefore "formulations." In plain language
Formulation
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30.  Launching API is expensive requires rigorous
research and subjected to validations and
regulations.
 On the other hand, the formulator merely
requires to prove that his product is bio-
equivalent to the existing formulations in the
class
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31. © Abhishek Shukla for investorji.in
Abhishek Shukla
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