Investing in ASX healthcare shares

What are ASX healthcare shares?

The ASX healthcare sector covers everything from biotech and pharmaceutical companies to owners and operators of hospitals and other medical facilities to designers and manufacturers of medical devices.

Our awareness of the healthcare sector has been acutely raised due to the demands upon it by the COVID-19 pandemic.

ASX healthcare shares include a diverse range of companies, some of which are among the largest listed on the exchange by market capitalisation. For example, leading biotechnology company CSL Limited (ASX: CSL) is the third largest company on the ASX, with a market cap of more than $140 billion.

Why invest in them?

Healthcare can be an exciting sector of the market to be exposed to because many companies operating in this space are at the cutting edge of science and research. 

Many investors would likely consider junior biotech companies high-risk, high-reward shares. They might only be in the research and development phase, with their drugs or therapeutics yet to pass the whole gamut of efficacy tests and clinical trials. While this makes it possible that they will fail, they might make a medical breakthrough and upend their industry.

However, not all healthcare shares are speculative growth shares, with many exhibiting defensive characteristics.

Investors often consider that more mature healthcare companies are great defensive shares to own, meaning their profits (and share prices) tend to hold up well even when the broader economy is in strife.

This is because spending on our personal healthcare is one of the last things we tend to cut back on when times are tough. In turn, this ensures demand for certain healthcare products and services – particularly hospitals, drugs, and medical devices – remains relatively stable, even in an economic downturn.

Top healthcare stocks on the ASX

The ASX healthcare sector comprises companies operating in two key industry groups: healthcare equipment and services, and pharmaceuticals, biotech and life sciences.

Those in the healthcare equipment and services industry might produce medical devices like hearing aids or imaging equipment for hospitals. They also provide services like specialist aged care.

Pharmaceuticals, biotech and life sciences companies develop and produce treatments for serious diseases, injuries, and other medical conditions. Some of these companies may be developing entirely new treatments – often using cutting-edge medical technologies – and so it can be a very exciting industry group to follow. 

Here we profile three top healthcare shares listed in order of market capitalisation from highest to lowest.

CSL

Since it was founded more than 100 years ago, CSL has grown into a leading global biotechnology company. It has three key areas of focus: influenza vaccines, rare and serious diseases (such as immunodeficiencies and neurological disorders), and iron deficiency. CSL has helped to provide Australians with access to quality healthcare since WWI.

Nowadays, CSL is one of the largest companies on the ASX and one of the exchange's most dependable blue-chip shares. It regularly brings in annual revenues exceeding US$10 billion and pays investors a healthy dividend. Its share price was also relatively resilient throughout the pandemic, proving it has defensive qualities too.

ResMed CDI

Based out of San Diego, California, ResMed is a medical device company specialising in treating chronic respiratory conditions, particularly sleep apnea. During the pandemic, it produced ventilators to help patients suffering respiratory symptoms of COVID-19.

The company's flagship products are its continuous positive airway pressure (CPAP) machines and accessories. These devices help users breathe comfortably and continuously while sleeping, improving their overall health.

Founded in Australia in 1989, ResMed has grown into a global healthcare company – but it could still have a long growth runway ahead of it. The risk of developing sleep apnoea increases with age, which means demand for ResMed's products may rise in countries with ageing populations, like Australia. 

Sonic Healthcare

From humble beginnings, Sonic Healthcare has grown into the third-largest medical diagnostics company in the world. The company performs blood tests, medical imaging, and other laboratory services to diagnose medical conditions. At the height of the pandemic, Sonic processed many of the COVID-19 PCR tests conducted in Australia.

Sonic has enjoyed a remarkable growth story. It was founded back in 1987 with a single pathology laboratory in Sydney. Sonic quickly expanded across the country, becoming Australia's largest pathology group in 1996. It has since expanded internationally through strategic acquisitions and organic growth, and is a global leader in pathology services.

What might the future hold for the healthcare sector?

Changing population demographics provide both challenges and tailwinds for the healthcare sector. 

Many countries, including Australia, have ageing populations with changing and increasing healthcare needs. There might be greater demand for aged care services, occupational and physical therapy, and drugs and other therapeutics that treat dementia, Alzheimer's and other age-related conditions.

Not only that, but advancements in medicine have made it possible for many people to live much longer with medical conditions. These people will require regular and ongoing care and treatment, increasing the demands placed on medical facilities.

The COVID-19 pandemic has also made healthcare an issue of national security. This may motivate governments to invest more in the sector through funding grants and other initiatives, which could provide further tailwinds for the sector.

What are the benefits of investing in ASX healthcare shares?

Different risk characteristics: Because the healthcare sector is so diverse, you can achieve a variety of investing goals by buying healthcare stocks. You can target high-growth or defensive shares depending on the company you invest in.

Proven history of success: In the five years between February 2018 and February 2023, the S&P/ASX 200 Health Care Index (ASX: XHJ) has gone up by more than 60% versus the broader S&P/ASX 200 Index (ASX: XJO), which has only increased by about 20% over the same period.

Investing in healthcare is ethical: When investing in healthcare shares, you're investing in companies that improve people's lives. This can be very important in an era when people are concerned about investing their money ethically. 

And the cons?

Barriers to entry are high: It costs a lot to develop, test, and market new healthcare products. This can make it challenging for new companies to succeed. Because junior companies don't have the same resources as their more established rivals, it can be tough to compete.

Risk of obsolescence: New treatments can quickly make older ones obsolete. New drugs, technologies, and therapeutics can sometimes come along that entirely replace older remedies.

Are ASX healthcare shares a good investment?

There are many benefits to investing in ASX healthcare stocks, but there are also risks as well. Whether ASX healthcare shares would make a good investment depends entirely on your investment objectives and risk appetite. 

But remember, healthcare is a diverse sector, with many different shares to choose from, each with their own risk and return characteristics.

If you wish to gain exposure to a broad basket of healthcare shares, you can purchase units in an exchange-traded fund (ETF). An ETF trades on the ASX just like ordinary shares but can expose you to a diversified portfolio of companies.

For example, the iShares Global Healthcare ETF (ASX: IXJ) invests in some of the biggest healthcare companies in the world and seeks to replicate the returns of the S&P Global 1200 Healthcare Sector Index (INDEXSP: SPG1200-35) before fees and taxes.

If you still need to decide whether healthcare stocks are right for you, seek the advice of a financial professional, like a broker or financial advisor, before making an investment decision.