He’s got a mutual fund to sell, of course, but he’s also got a point. While technology companies often see their cutting-edge products turn into dime-a-dozen commodities in a matter of months, new health-care products are better protected by paten ts and earn fat profits for years. Even more important for investors is the revolution reshaping the way we get our medical care. After managed-care companies began storming the country, HMO stocks soared by 67 percent in 1992 and rose by more than 25 pe rcent in each of the next three years, according to Morgan Stanley. Now earnings are stalled partly because HMOs have fallen victim to their own success. Meanwhile, though, a whole new class of hot companies has sprung up to serve-or compete with- the HMOs.
How much fire is left in these stocks? “After being insulated for decades, the industry is only halfway through the cycle of change,” says Lanny Thorndike, a healthcare analyst at William Blair & Co. Here are some companies and mutual funds that a re likely to enjoy the ride:
Stocks: A not-so-funny thing happens when HMOs offer cheap doctor visits: people go more often. And when they can’t find their doctors? They go to the emergency room. Access Health (Nasdaq), based in Rancho Cordova, Calif., solves these headaches by acting as a telephonic “concierge” for HMOs. Its staff of nurses fields members’ questions about fevers, rashes and any other medical issue, often making a trip to the doctor unnecessary. Though Access fi rst sold this service as a cost-saver, HMOs are beginning to see it as a way to keep members happy. The downside: at $48, Access is a pricey stock, up by more than 800 percent since early 1995. But there are two reasons to buy. First, a host of forces is pushing consumers to take responsibility for both the cost and the state of their health. Access is the only company squarely in the path of this trend. Second, though it is already handling 11.5 million consumers, Access “has barely scratched the surface of the market,” says Stuart Goldberg, a Merrill Lynch analyst who predicts that earnings will grow at 35 percent a year and the stock will hit $51 within a yea r.
Don’t look at the price chart for Apria Healthcare Group (NYSE)–it’ll scare you away. Apria’s stock fell from $85 early last year to $18. What happened? Its predecessor companies merged in 1995, creating the largest and best provider of home care but cramping profits. It’s already on the comeback trail, though. The company, based in Costa Mesa, Calif., has finally switched all 850 branches to a new information system. And the merger has given Apria broader geographic scope, and thus more appeal to large HMOs, such as United Healthcare, which want one shop to handle their at-home care around the country.
Apria’s business will grow because treating folks at home, rather than at a clinic or hospital, is everybody’s first choice. HMOs like the lower costs. Patients like the convenience. New technology and more sophisticated staffers are allowing Apri a to handle a growing number of illnesses, too, including some forms of cancer. All that should fuel growth of 10 percent a year. William Blair’s Thorndike expects Apria to do even better-profits up 15 percent a year-because the company is an efficiency whiz compared with its competitors.
Can’t quite wean yourself from the tech-stock habit? Here are two companies that are leading the health-care industry out of the Dark Ages. HBO & Co. (Nasdaq) made its name helping hospitals automate administrative chores and counts haft of the market as customers. Now it’s moving into doctor groups and HMOs, which badly need to track their performances in order to control cos ts. “Health care is one of the most information-intensive industries, but it’s still relying on handwritten charts and notes,” says Carolyn Luther, an analyst at Montgomery Securities in San Francisco. The beauty of HBO: some 45 percent of its $780 milli on in revenues can be counted on year after year and cover all of the company’s fixed costs. That’s one reason HBO is able to snap up smaller companies whose products can be sold to its existing customers. Montgomery expects HBO’s stock to scoot up to $8 5, from $64, over the next 12 months.
HPR Inc. (Nasdaq) is the small-fry counterpart to HBO. But instead of hospitals, its focus is managed care. And instead of automating mundane tasks, the company, based in Cambridge, Mass., helps customers figure out the tab for an episode of sickn ess. What makes HPR’s systems unique: they marry medical knowledge to administrative information so an HMO can analyze its quality of care as well as its costs. “The next step for managed care is tagging doctors as ’efficient’ or ’not efficient,’ and tha t’s what HPR can do,” says Seth Frank, at Equitable Securities in New York.
The bulk of HPR’s revenues comes from an older software program that saves health insurers a ton of money by spotting errors in medical claims. Sales of that program, commercialized by Marcia Radosevich, the company’s CEO, will grow at a solid pac e, while HPR’s newer offerings move even faster. Frank expects profits to rise 35 percent a year, driving the stock price up to $22.50, from $14.25, during the coming year.
Funds: There’s no better way to bet on the long-term growth of the health-care sector than with Vanguard Specialized Health Care. It’s outraced the market in any period you look at-beating the S&P 500 index by an average annual 10.22 percentage po ints during the three years ended in August. Whew! Manager Ed Owens doesn’t juice his returns by pouring all his money into smaller, riskier stocks. Instead, his portfolio mirrors the entire health-care industry, so pharmaceutical companies dominate. Tha t means the fund, which has no sales charge, doesn’t shoot the moon when biotechnology and medical-device stocks are exploding. But it also means you won’t face the abyss when those volatile stocks crash.
T. Rowe Price Health Sciences also has spectacular promise. It’s lavished a 22.5 percent return on shareholders this year–by far the best of the funds specializing in health stocks. While it can be easy to jack up the returns of a brand-new fund, manager Skip Klein is showing admirable restraint. His dicier investments in small health-care companies, which make up about half the portfolio, are balanced by more stable giants like Eli Lilly and Warner Lambert. The fund is only nine months old, but Klein is no novice. He’s been analyzing health-care stocks at the company for seven years, feeding ideas to T. Rowe Price’s excellent Science and Technology fund, among others. Perhaps his turn from high tech to health should be a signal to us all.
