Why it is called defensive
People do not stop taking medicine or needing operations in a recession, so healthcare companies' sales tend to be steadier than those of carmakers or retailers. Ageing populations in most wealthy countries add to long-term demand.
Steadier does not mean immune. Individual healthcare companies have suffered very large falls.
The patent clock
A new drug is protected by patents for a limited time. While they last, the company can charge a high price. When they expire, cheaper copies arrive and sales of the original often drop sharply. This is known as a patent cliff.
A drug maker is therefore always racing to replace its best sellers. Checking how much of a company's sales come from one or two drugs, and when their patents end, tells you a lot.
Biotech is a different animal
Large drug makers have dozens of products. A small biotech company may have one, still in clinical trials. If the trial succeeds the shares can multiply. If it fails they can lose most of their value in a day.
Most experimental drugs do not make it to market. Holding many biotech companies spreads that risk but does not remove it.
Politics sets prices
In most countries the government is the main buyer of healthcare, directly or indirectly, and negotiates what it will pay. In the US, drug pricing and health insurance are recurring political issues.
A change in pricing rules can alter a company's profits without anything changing about its products.
The parts of healthcare
Large drug makers
Develop and sell medicines worldwide.
For example: Eli Lilly, Novo Nordisk, AstraZeneca, Johnson & Johnson
Biotechnology
Develop newer kinds of treatment. Ranges from large and profitable to tiny and unproven.
For example: Amgen, Vertex Pharmaceuticals, Regeneron
Medical devices
Make equipment used in hospitals and by patients.
For example: Medtronic, Abbott Laboratories, Intuitive Surgical
Insurers and services
Pay for and organise care, mainly in the US.
For example: UnitedHealth, Elevance Health
Laboratory tools
Supply the equipment drug makers and labs depend on.
For example: Thermo Fisher Scientific, Danaher
Companies are listed to show what each category means. They are not recommendations, and the list is not complete.
Three ways to invest
There is no single right route. Many people combine them, and plenty decide a broad global fund is all they need.
- 1
Buy individual shares
Pick one or more healthcare companies and buy their shares through a broker or investing app.
- Good for
- Simple to understand. You own exactly what you chose.
- Watch out for
- If you only hold a few companies, one bad result can do real damage. Picking winners is hard, even for professionals.
- 2
Buy a ready-made fund
A fund (often an ETF) holds dozens of companies in one purchase. Examples include the Health Care Select Sector SPDR Fund (XLV) and Vanguard Health Care ETF (VHT) in the US, and the Xtrackers MSCI World Health Care UCITS ETF (XDWH) in the UK and Europe.
- Good for
- Instant spread across many companies, with very little effort.
- Watch out for
- You get what the fund provider chose, including companies you may not want. Themed funds usually charge more than broad trackers, so check the yearly fee and the top ten holdings. Which funds you can buy depends on where you live.
- 3
Build your own portfolio
Choose your own mix of companies and how much of each, then buy them through your broker. This is what Arithmos helps with: describe the mix in a sentence and it builds and tests one for you to consider.
- Good for
- You decide exactly what is in and what is out, and you can see the reason for every company.
- Watch out for
- More to look after than a fund. Buying many separate shares can cost more in dealing fees, and a tested result is a simulation, not a promise.
What $100 would have done
To make this concrete, here is a real portfolio from this area that anyone can open on Arithmos, and what $100 put into it would be worth. It is one example, shown as it is, whether it went up or down.
If you’d put $100.00 into this portfolio of 12 companies…
The risks
- Patent expiry. Sales of a best-selling drug can fall quickly once copies are allowed.
- Trial failures. Promising treatments often fail in late-stage testing.
- Price regulation. Government decisions can cut profits.
- Legal action. Drug and device makers face large lawsuits over safety.
- Dependence on a few products. Some very large companies rely heavily on one area, such as weight-loss drugs.
Try it yourself
The quickest way to understand a portfolio is to look at one. Here is how to turn this guide into something you can inspect.
- 1
Start from the idea
The button below opens the builder with this guide's idea already typed in. Change any part of it: the number of companies, the countries, the limit per company.
- 2
Read the reason for every company
You get a list of companies, how much of each, and a plain-English reason for each pick. If one looks wrong to you, you can ask for it to be changed.
- 3
Look at the bad years, not just the good ones
The portfolio is replayed against real past prices. Check the biggest fall along the way, and ask yourself whether you could have sat through it.
- 4
Decide for yourself
If you want to act on it, you buy the shares yourself through your own broker. Arithmos never holds your money or places trades.
“Large healthcare companies worldwide: drug makers, medical device makers and health insurers. 25 companies, bigger companies get a bigger share, no company over 8%.”
Browsing portfolios other people have published is free. See pricing for what building your own includes. A tested result is a simulation using past prices. It is not a forecast and not a recommendation.
Common questions
What is the difference between pharma and biotech?
The line is blurry. Pharma usually means large companies with many established medicines. Biotech usually means companies developing newer biological treatments, many of them smaller and riskier.
Are healthcare stocks safe in a recession?
Their sales tend to hold up better than most, but share prices can still fall, and individual companies face risks of their own such as patent expiries and failed trials.
What is a patent cliff?
The sharp drop in a drug's sales after its patents expire and cheaper versions go on sale.
