The health care sector has been one of the best performing sectors of 2013. Investors are excited about the sector, and they are willing to put their money into health care companies. The Health Care Select Sector SPDR (XLV), an ETF, has risen more than 26% since the beginning of 2013.
However, many individual companies in this sector have surpassed the return posted by the ETF. Among these companies, Universal Health Services (UHS 2.32%), Alnylam Pharmaceuticals (ALNY 0.96%) and Alere (NYSE: ALR) are my favorite stocks. These companies represent different industries in the health care sector and have great prospects going forward.
Performance metrics support this hospital
Universal Health Services owns and operates acute care hospitals, behavioral health centers, ambulatory health centers, surgical hospitals, and radiation oncology centers. Its second-quarter results were impressive as it was able to beat expectations on both top and bottom lines. On a year-over-year basis, the company's revenues and EPS figures expanded.
One of the major ways hospitals make money is through inpatient revenues. This revenue is derived from patients who come and stay at a hospital, while receiving treatment for their health problems. The average revenue per occupied bed metric is used to determine how well a hospital is making inpatient revenues.
UHS derives approximately 30% of its revenues from behavioral health hospitals. The number of licensed beds in these hospitals is more than three times more than the acute hospitals. The occupancy rate in these hospitals is close to 75% whereas the occupancy rate in acute hospitals is close to 54%. The greatest factor, however, is the average length of stay. Patients stay, on average, 13.5 days in the behavioral hospitals and 4.5 days in the acute hospitals. This drives up the weighted average length of stay at UHS.
Source: Company SEC filings.
The above chart shows UHS' performance in comparison to two other major players in the hospital industry; Community Health Systems (CYH) and HCA Holdings (HCA). The higher average length of stay and occupancy rates at UHS lead to strong average revenue per occupied bed.
Innovative solutions set to become profitable
Alere develops products that allow patients to extend their diagnosis from the lab and doctor's office to the comfort of their homes. Alere's programs allow health care providers instant access to diagnostic results, helping them to make timely decisions. The purpose of Alere's offerings is to reduce hospital visits and health care costs for their patients.
The company leading near-patient diagnostics focus on cardiology, toxicology, and infectious diseases. What interests me is the company's move into proving diagnostic solutions for diabetics. Alere has partnered with AT&T and WellDoc in this regard. The 300,000 diabetics served by Alere will now have access to WellDoc's breakthrough application known as DiabetesManager. The application is the only one that has been cleared by the regulatory authorities for real-time type 2 diabetes medication and coaching. Through the application's point-of-care diagnostics, health care providers and patients would be able to identify the primary cause of the health care crisis and work toward eliminating it.
The company has taken on debt to finance its acquisitions in the earlier years. Alere CEO Ron Zwanziger has stated that the company formation is essentially complete, and his next focus will be on deleveraging Alere's balance sheet. An activist investor has also proposed the sale of the company's drug testing business, which can bring up to $2.5 billion into the company and help it pay its debt liabilities. Things are looking positive for this company.
Counting on a new field in medical science
Alnylam has a list of drugs in its pipeline that have the ability to take this company to new heights. The company's focus is on developing fresh therapies based on RNA interference, or RNAi. RNAi is a new field of medical science that targets particular RNA (an information molecule similar to DNA), either to silence them or adjust their expression. RNAi-based therapies can become the next big thing in the biotech industry.
The company's stock rocketed in July. This is because the company's early-stage clinical results showed great signs of improvement. Alnylam is working on a development therapy known as ALN-TTRsc. This therapy is targeted toward a rare genetic disorder known as transthyretin, or TTR, amyloidosis disease. The early-stage clinical results showed that the therapy reduced the levels of the disease by a staggering 80%. Not only this, but the company's clinical subjects reported no problems while they received the experimental batch of drugs.
Another drug by Alnylam that has garnered attention is the ALN-PCS. This RNAi therapy was able to reduce LDL cholesterol levels by 50% and PCSK9 protein levels by 84% in a phase 1 demonstration trial. After further testing, the drug will be taken into mid-stage development. The drug might just become a successful treatment for high cholesterol. This is one exciting biotechnology company to invest in.
Foolish takeaway
I believe that there are many tailwinds for the health care sector going forward. Investors often take a cautious approach and get exposure to the sector by investing in ETFs like the one mentioned above. However, they can take a more proactive (and riskier) approach by constructing a portfolio that can provide better returns. I believe that UHS, Alere, and Alnylam are growth stocks poised to perform well over the long term.
