Once upon a time in 1955, Fortune Magazine published its first Fortune 500 list, an annual list that ranks the top 500 U.S. public and private companies based on their gross revenue. The original Fortune 500 was restricted to companies whose revenues were derived from manufacturing, mining, or energy exploration, although Fortune published some ancillary lists of the 50 largest commercial banks, utilities, life insurance companies, retailers and transportation companies. Look closely at those early lists; the closest thing to a healthcare company that appears in the original Fortune 50, the top of the list, is Procter & Gamble. I am not really sure what P&G’s primary brands were in 1955, but their claim to fame in healthcare currently includes toothpaste and tampons, not the “big stuff” such as pharmaceuticals, health insurance, medical devices or healthcare services/IT.
Procter & Gamble remained the only healthcare-ish company in the Fortune 50 until 33 years later in 1988, when Johnson & Johnson joined it on the list. While there were a few companies that may have dabbled around the fringe of healthcare before 1988, such as Hewlett-Packard, healthcare has had a real presence in the Fortune 50 for only the last 23 years. As recently as 2001 there were only 5 companies on the Fortune 50 list that derived all or most of their revenue from the healthcare industry.
Boy what a difference a decade makes. Earlier this month PriceWaterhouseCoopers (PwC) released a report entitled “Booming Healthcare Economy is Driving New Gold Rush“. The jumping-off point for the report is the fact that 76% (!) of today’s Fortune 50 companies are either entirely in the health industry or have burgeoning health divisions. For you math geniuses out there, that is a pretty big jump, from 2% to 76% in 24 years. Those are the kind of growth numbers that make investors like me get all warm and fuzzy.
10 years ago none of the Fortune 50 were health insurance companies (there are two now: United Health Group and Wellpoint). Energy, telecom and finance companies that dominated the list 10 years ago have been replaced by healthcare IT, pharmacy/pharmaceutical and medical products companies.
Of the 38 healthcare-dedicated or healthcare-oriented companies in the 2011 Fortune 50, 24% are “traditional” healthcare companies while the balance are “entering the healthcare market in non-traditional ways,” according to PwC. They add, “The booming health market, which is expected to account for nearly one-fifth of US GDP by 2019, is driving a surge of activity from companies looking to mine opportunities for growth, differentiation and jobs.” This means that traditional healthcare companies are getting bigger (e.g., McKesson has moved from 35th to 15th on the list due to annual revenue growth from $37 billion to $108 billion); and companies that are diversifying into healthcare are wearing it on their sleeves. Examples of these new entrants include Wells Fargo, Apple, and Best Buy, each of which has dedicated significant resources to new healthcare businesses in the past few years. These and many other companies are trying to become the Levi Strauss of the new healthcare gold rush, providing a backbone of products and services to payers, providers and consumers as they hurtle down the trail of aging baby boomers and nearly universal health insurance coverage.
For those of us who were working in venture capital and private equity 10-12 years ago, it is easy to remember how out-of-favor the sector was at the time. Today it is becoming clear that healthcare is the place to be. While there is much hoopla around LinkedIn and Pandora and Groupon, there are countless emerging healthcare companies that are very much the real deal. Demand for healthcare services of every type is rising, creating great investment opportunities. There is a rapidly growing and diversifying consumer base that has begun to talk about healthcare at the dinner table, not just when they have to visit a family member in the hospital. These same consumers are expected to spend nearly $14 billion annually out-of-pocket on healthcare products and services, in addition to whatever they are spending through their health insurance.
Notably, the number of healthcare jobs increased 65 percent between 1990 and 2009, while the rest of the workforce increased only 16 percent over the same time period, so there is an increasingly available and highly trained set of employees out there. While regulation abounds making the marketplace more complex than many others, the silver lining of laws such as the Patient Protection and Affordable Care Act (PPACA) is that the health insurance market is about to skyrocket in size, yielding tens of millions of new customers and a huge opportunity to help leading insurance and provider enterprises transform their businesses to achieve better operating and clinical efficiencies. An especially positive feature of the expanding healthcare field is that there is a whole new universe of potential acquirers needing to populate their nascent pipelines by slurping up young, blossoming healthcare businesses.
PwC cautions that traditional companies looking to break into healthcare had best do so carefully so they do not run afoul of complex regulatory, reimbursement and purchasing environments. That is definitely a risk, but what I know is that hundreds of young companies are lining up around the block to show me and the other healthcare-focused investors out there how they are going to help the old guard rise to that challenge.
Yes, the high technology marketplace will always be hot, but it’s looking more and more like there’s gold in them-there healthcare hills. It will be very interesting to see what the Fortune 50 list looks like after the key provisions of PPACA go into effect in 2014. Walmart, a key player in the changing world of healthcare, overtook Exxon to be number 1 on the Fortune 50 list in 2010; Walmart remains the only healthcare-focused company in the top 10. The way things are going, I don’t think they are going to be lonely for long.
Note: this post also appeared on June 21, 2011 in PE Hub at this link