Healthcare Products and Supplies is a unique sub sector of healthcare that holds the potential for great growth opportunities in the coming years. The sub sector is extremely vast, with companies providing products and supplies to a variety of medical areas such as cosmetic surgery, eye care, cardiology, orthopedics, and diabetes to list just a few. Within these major areas, HCP&S ’s products are further divided into higher tech products such as drug eluting stents (DESs) and lower tech products such as hypodermic needles and scalpels.

In addition to the diversification of products, there are many other variables that affect the profitability and riskiness of companies in the industry. One example would be the geographic revenue breakdown, since revenue concentration in foreign markets typically increases risks associated with exchange rate fluctuations as well as changes in demand. However, geographic diversification simultaneously reduces risks to an ever changing healthcare landscape proposed by president elect Barack Obama.

Raw material costs and corporate hedging strategies also prove to be important factors in minimizing costs, an essential element required to survive a global recession. A prime example here is Becton Dickinson and Co. (BDX), where resin costs account for a whopping 7% of COGS. Thus, it is obvious that you cannot simply decree this whole sub sector overweight or underweight, because it is both. Keeping this all in mind, which areas in HCP&S will be the winners, and which will be the losers?

Cardiological device: drug eluting stent (DES)

Separating the Best from the Worst

In this current environment where discretionary spending is suffering, companies that offer products and supplies related to eye care/surgery (Alcon Inc (ACL), dermatological care (Cynosure Inc(CYNO), orthopedics (Stryker Corp (SYK) or cosmetic surgery have short-term underweight outlooks. Demand continues to weaken, as these procedures do not address life-threatening situations. For example, in terms of implantable orthopedics, Stryker Corp. distinctly cites “stricter pricing guidelines” as a major risk going forward in the company’s 10-K. The company states further that “changes in reimbursement rates by third party payers and governments could have significant negative effects on the operating results of the firm” as these regulatory entities try to reduce ever-rising healthcare costs, according to SEC filings. This, coupled with weak demand and growing obsolete inventories (another risk listed on its 10-K), reassures us that orthopedics are in store for a rough series of quarters.

In times like these, as an investor, one must realize when consumers are strapped for cash, laser eye surgery, cosmetic surgery and other discretionary healthcare expenditures fall out of sight next to paying the mortgage or buying groceries.