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Healthcare Sector Anyone?

I’m often asked why I don’t trade more equities within the Healthcare Sector. I am a retired pensioner of Abbott Laboratories where I enjoyed a career in sales and sales management. Most of the students here at OptionsAnimal know that I almost always have a position on Abbott’s stock, ABT.

healthcare
Image by themikemckee via Flickr

There are several reasons why I consider healthcare, in general, a risky place to be. Nevertheless, I take comfort in trading my former employer, ABT. Let’slook atthe pros and cons of trading healthcare stocks.

PROS

  • Aging Baby Boomers
  • People live longer & with chronic diseases
  • Obesity and Diabetes Epidemics
  • Technological Advances
  • Global Research of Disease
  • Personalized Medicine

CONS

  • Single Payer System (Medicare/Govt)
  • Expenditure an increasing share of GDP
  • Uninsured Patients
  • Cost Controls
  • Consumerism

One of the difficulties with American pharmaceutical companies is the cost of bringing a new product to the market for use. The portion of their revenue spent on research and development of new products is mind-boggling. For example, in 2009 Abbott spent more than 2.7 billion dollars on R&D, nearly 9% of their gross sales. It was widely repeated within the industry that it “takes about fifteen years to bring a new product to market.” First there’s the “discovery” phase where testing is done in a laboratory setting which takes years. Then, if there is perceived human benefit, Phase II and Phase III trials must be completed. All products undergo a rigorous examination by the FDA. While the entire process is difficult and tedious, there is no guarantee that the product will be successfully brought to the open market to generate revenue. This is just a thumbnail sketch of one obstacle. Each “con” listed above is formidable.

The investor/trader in the healthcare industry must be especially vigilant about the company pipeline and products. Unplanned events can and do happen to cause a big drop in share price.

So, why I am comfortable putting my money to work in ABT stock? It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. Their diverse product line gives the company a balanced source of revenue. Abbott distributes products in more than 130 countries worldwide. Bottom line? I know this company inside out. Even when the FDA has thrown them a curve ball, they have responded like pros. They are my favorite “old stodgy dividend stock.”

Emilu Bailes
OptionsANIMAL Instructor

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