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How Healthcare Companies Can Protect Their Profits

The health care industry plays an essential role in a country’s economy. This is due mainly to the fact that people can cut down spending on cars or food, but never on their health. Therefore, many consider the health care industry as a defensive industry. What are some of the possible economic moats that a company in this industry can build to ensure sustainable profitability?

Patents

For pharmaceutical companies such as Eu Yan Sang (SGX: E02), protecting their innovation through patents is an important technique in preventing competitors from copying their products. Eu Yan Sang is a Traditional Chinese Medicine manufacturer which has a presence across the Asia Pacific region.

Medical devices suppliers like Biosensors International (SGX: B20) also require patent protection for their products. The company’s main products – drug eluting stents – are also protected through patents which helps ensure its status as one of the largest stent-producing companies in the world.

Economies of scale

Size is a huge advantage for companies in the health care industry. It can help create a strong brand name which then gives consumers a much stronger confidence in their abilities. For example, Q&M Medical Group (SGX: QC7), the largest dental group in Singapore, has carved out a household brandname for itself for anyone seeking dental services in Singapore.

Meanwhile, IHH Healthcare (SGX: Q0F) is one of the largest global healthcare providers. It operates through a few brands such as Pantai, Parkway Health and Apollo. It will be hard for competitors to match the company in terms of its brand equity.

Product Differentiation

Lastly, a company can also create an economic moat through product differentiation.

Riverstone Holdings (SGX: AP4), a niche glove maker for the medical and electronics sector, has formed a niche of customised medical gloves for customers who require special gloves for some of their processes. It is extremely difficult for competitors to break into their customer-base, as there is little incentive for customers to switch once they are satisfied with Riverstone’s product.

Foolish Summary

The health care industry is a highly competitive and regulated industry. For companies who are able to create an economic moat surrounding its business, it is often rewarded with high returns. This is because the value they deliver to their customers, by restoring their health, is far more important than any amount of capital their customers might have.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.