The medical equipment and supplies sub-sector of health care has come under significant pressure in the last 9 months or so. Big names such as Stryker Corp. (SYK), Zimmer Holdings Inc. (ZMH), and Medtronic Inc. (MDT) are trading at levels we have not seen in years. The whole aura of health care being “recession resistant” or “recession proof” is now thrown away and is an old folktale. Although these economic times are pretty much unprecedented, one thing is for certain: there has really been no safe place to hide in health care, except maybe to the likes of generic drug manufacturers such as Teva Pharmaceutical Industries (TEVA) or Mylan Inc. (MYL).

The depressed Medical Equipment and Supplies industry has faced many headwinds recently. The recession has directly caused a general slowdown in elective procedures coupled with ongoing reductions in hospital capital expenditures. The Department of Justice in the last year has brought many lawsuits to the companies mentioned above and the FDA has increased inspections of manufacturing facilities because of safety concerns. Similarly, another headwind they face is the increasing value of the dollar. The bottom lines of these companies have been adversely affected since a large portion of the industry derives revenues outside of the United States.

The healthcare industry is undergoing a large transformation and the whole landscape has drastically changed in the last few quarters. The distressed markets have created immense opportunities for large cap pharmaceutical and biotechnology companies looking to expand their business by expanding their product lines.

Even though credit is hard to come by, these “cash cow” companies have been able to raise the necessary funds in order to successfully follow through with their acquisition strategy. In the last few months we saw Pfizer (PFE) purchase Wyeth, Merck (MRK) sweep up Schering Plough, Roche (RHHBY.PK) acquire the rest of Genentech, and Gilead Sciences (GILD) acquire CV Therapeutics.

The recent volatility from the Healthcare sector has left many investors wary about where to place their money. General market swings aside, M&A activity and legislative developments have intensified the uncertainty in the sector, but have also led to many investment opportunities.

M&A has been very exciting and has ramped up heavily in the last few months. Pfizer (PFE) and Wyeth, Roche and Genentech (DNA), Merck (MRK) and Schering-Plough (SGP), Gilead (GILD) and CV Therapeutics (CVTX) have all hit the headlines. Obama’s Healthcare Budget Plan has stirred up heavy trading in recent weeks, putting downward pressure on the Managed Care and Pharmaceuticals sectors, while giving a boost to the generic drugmakers.

TEVA, the “Generic Giant,” as I referred to it back in November when I recapped its quarterly earnings, continues to outshine and outclass its peers on pretty much every level. Since I have followed healthcare equities for quite some time now and kept my focus solely on this sector, it is easy for me to say that Teva (TEVA) is one of the best-managed companies out there, and I think you would agree based on its recent performance and strategic moves.

Earnings for the fourth quarter were highly scrutinized by all investors and Street analysts as our financial crisis continues onward, perhaps even getting worse. Many companies unloaded their books for fourth quarter earnings, marking down what is left. Others squeaked out positive gains but still were hesitant on guidance.

2008 was quite an interesting and exciting year for the Healthcare sector. Each sub-sector was struck with their own disruptions and it caused industry wide job cuts and strategic maneuvers. The Obama administration has come in and new legislation will be passed most likely hurting Biotechnology, Pharmaceuticals, and Managed Care. Only time will tell who stands on top after the talks of startling changes quickly dissipates.

Abbott Laboratories (ABT)

Gilead Sciences (GILD) pleased its investors yet again with another quarter of great earnings. The biotechnology company from Foster City, California has truly proven to investors that they can withstand the tough economic conditions across the globe, even offering high priced drugs. More importantly, the company has built up a respectable reputation on the Street as being a “staple” biotech holding for anyone’s personal portfolio. As you have seen in my recent article concerning GDP Healthcare numbers that were reported, prescription-drug spending slowed to its lowest rate in 45 years. We will expand on how Gilead avoided industry-wide troubles later. For those anxious Gilead shareholders who were waiting on a Pfizer (PFE) buyout after some talk that they would try to make a large acquisition in order to gain exposure to biotech, I am very sorry. But, no need to dump your shares, Gilead is here to stay.

A Glimpse from Above

Johnson & Johnson (JNJ) reported fourth quarter earnings on Tuesday beating estimates and making many analysts, who were once quite skeptical about the company, somewhat excited. However, shortly after the net income and EPS numbers came out, JNJ lowered guidance. This understandably came during tough economic conditions (yes, even for a healthcare giant like JNJ).

Johnson & Johnson did have quite an exciting year, especially in the fourth quarter as they were able to continue their trend of making strategic acquisitions, sweeping up companies engaged in the manufacturing and discovery of niche market products and drugs. That trend will continue through 2009, I believe with the deep valuations that are out in the market, but we’ll get into that a bit later. Let’s take a look at some of the numbers.

We all know that healthcare makes up a large component of our nation’s GDP, or Gross Domestic Product, but exactly how much is it and what changes have we seen from last year’s report? Well, GDP is obviously a closely watched measurement of our overall economy, and jumping into the calculations gets pretty intricate so we will stick somewhat to the basics of the Healthcare numbers.

Healthcare costs have moved swiftly into the limelight of the recent Presidential election, and more specifically now into the hands of President-elect Barack Obama. Rising healthcare costs, the countless uninsured, and comparisons to other countries’ low-cost healthcare coverage will remain in the spotlight for years to come. It will be extremely difficult to have a complete overhaul of our healthcare system, but I imagine different legislation will pass through and hopefully give some relief to a very large problem within the United States economy. Why don’t we have a look at the most recent numbers to come out?

Looking back through 2008, the Healthcare sector has hit some huge hurdles. Patent concerns and expirations were worries for all major firms, the Department of Justice hit Med Tech with fines, Big Pharma made thousands of job cuts, Managed Care got demolished with enrollment cuts, and investors struggled to find much, if any safety in the whole sector.

Going forward, 2009 will be quite an interesting year in the markets and the ever-so struggling economy. More M&A activity and consolidation will not only be seen within the Financials sector, but will also spread across other sectors. We have seen this ramp up quite a bit due to lofty predictions by some analysts regarding unforeseen buyouts of large Biotech firms by Big Pharma, and heated debates on the Street will be prevalent. Some names that have been thrown out are Merck (MRK) buying Gilead (GILD) and Pfizer (PFE) purchasing Amgen (AMGN). Although those are pretty big bets, nonetheless, it will be quite an exciting year ahead. When looking to invest in Healthcare, there are five things I would like you to keep in mind:

In no way do I feel the market has bottomed out or that the credit crisis has skidded to a halt, but in the words of Warren Buffett, “Be fearful when others are greedy and be greedy when others are fearful.” What does this mean for you, an investor? Invest in equities, now! In past articles I have noted that the Healthcare sector’s mistakenly being referred to as “recessionary proof” is quite a misconception; however, as a long-term investor (minimum three years), like an sa myself, you should be “greedy.” And what a perfect time it is to be greedy. Consumer confidence hit an all-time low of 38 in October, its lowest level since inception in 1967. An intelligent investor will act now.

It is time to restructure your personal portfolio, and you should look to the Healthcare sector for some growth and value. It can get a bit overwhelming when trying to find that right holding in each sub-sector in order to effectively diversify yourself and hedge against risk. You may ask yourself, should I put my hard-earned money into Pharmaceuticals, Biotech, Medical Device, Insurers, or Generics? I will touch upon all of these sub-sectors and answer your much needed questions. The stocks that I will discuss below will provide additional protection on the downside, and some will take your portfolio to new levels.

With another tough day in the market following the Presidential Election, the world’s largest generic drug maker topped 3rd Quarter net profit forecasts. Teva (TEVA) headquarted in Israel, develops, manufactures, and markets generic and human pharmaceuticals. They also participate in the formation of active pharmaceuticals, or APIs, in North America, Europe, Latin America, Asia, and Israel.

Teva’s net profit for the quarter, excluding one-time items, was $599 million or $0.72 per diluted share, compared with $525 million, or $0.64 per share. Sales increased 20% to a record of $2.84 billion.  Average analysts estimates from Reuters for Teva were EPS of $0.70 on sales of $2.89 billion.

The markets cannot seem to catch a breather, find a glimpse of hope, or even come close to ending the day flat. Even Healthcare has been getting beaten up recently. Recessionary proof? I do not feel anything is recessionary proof in this current environment. The Healthcare Select Sector SPDR (XLV) is down 22.54% year to date, not quite near the Financials SPDR, XLF down 47.18%, but still more than ever expected in a bear market. So, where does that leave an investor like you trying to find that bottom, time it right, and catch huge on the upside? Well, I won’t necessarily provide you with that information because I think we still have quite a long way to go before we can recover.

However, I will provide you a staple holding to your portfolio. No, not something like a Wal-Mart, Protor and Gamble or a CVS Pharmacies, that is actually a staples company. I am referring to Johnson & Johnson.  You might think that JNJ is a very unoriginal thought and possibly a no-brainer to anyone who is diversifying a portfolio, but many people have strayed away from it because of its Pharmaceutical exposure.  Investors forget its nice dividend (2.9% yield), which is not as high yielding compared to its competitors like Pfizer (PFE)  (7.3% yield), Bristol Meyers Squibb (BMY) (6.6% yield), Sanofi-Aventis (SNY) (5.3% yield), and Merck (MRK) (5% yield) just to name a few.

I have not been the first nor will I be the last to point out the troubles of Big Pharma; however, how can you as an investor take advantage of the weak sub-sector and transfer your investments to another attractive area of Healthcare that will be reaping the benefits? In this article, I will point an attractive industry that will be benefiting from what I like to call the "Big Pharma Effect".

What’s happening in Big Pharma?

So Big Pharma is hurting? Well, Standard & Poor’s does estimate that patent expiration losses in 2008 will exceed $20 billion. I cannot even remember the last time Merck (MRK) got something approved or did not report poor results from a clinical trial. Does Pfizer (PFE) have a strategy going forward to make up for the loss of Lipitor?

The outlook for Big Pharma is very disheartening through 2012. Are there any companies that have slipped through the cracks and emerged as a great Large Cap Pharma player? I can say confidently that Abbott Laboratories (ABT) [56.21, 0.00 (0.00%)] is a fundamentally sound company, strategically broken down into five segments, and has a bright future.