Monday, November 17, 2008

Value creation in health care: A sector-by-sector analysis

Value creation in health care: A sector-by-sector analysis

Success is not just about top-line growth.

NOVEMBER 2008 --- from Mckinsey Quarterly

The US health care industry has outperformed the S&P 500 for two decades, creating more than $700 billion in shareholder value creation since 1985. This strong overall growth, however, does not mean the industry’s performance has been uniform across companies and subsectors.

To understand the industry’s performance at a more detailed level, we examined nearly 1,900 publicly traded health care companies from 1985 to 2007.1 At the core of our analysis is a detailed breakdown of each company’s total returns to shareholders (TRS). Not surprisingly, an analysis both of fundamental factors (sales growth, margin changes, and the capital needed to sustain growth) and of capital market factors (initial price-to-earnings ratios, changes in P/Es, and levels of dividend payouts) showed that over the long run, good performance drives TRS. Over shorter periods, however—and particularly over the past ten years—changes in expectations as measured by P/Es have outweighed the impact of growth in earnings themselves.

What follows is a narrated interactive chart pack that presents a snapshot of the industry, highlighting which sources of value to shareholders were strongest at different times over the past 22 years. 


1For every year they were in the database; the database is dynamic, and not every company existed for the full 22 years of the analysis. To avoid the distorting effects of currency fluctuations, we further limited our analysis to include only those companies reporting performance in US dollars.

Listen to commentary and explore detailed total returns to shareholders (TRS) data from 1985 to 2007 for the health care industry overall, as well as the pharma, biotech, devices, distributors, payers, providers, and services sectors.

Value creation in health care: A sector-by-sector analysis
In this narrated interactive chart pack, McKinsey consultant Susan Nolen Foushee offers a snapshot of the ebb and flow of total returns to shareholders (TRS) in various health care sectors over the past 20 years.