Over the years, healthcare stocks have been a nice source of investment opportunities. The medical world is undergoing major innovation — both in terms of breakthrough treatments as well as digital technologies.
But of course, there are lots of risks too. The election of President-elect Joe Biden does pose a major one. While he will certainly be a big supporter of wide access to healthcare through the Affordable Care Act, he will also likely be more restrictive in terms of the pricing on new drugs and treatments.
Yet there are some offsetting factors. If Democrats do not get control of the Senate, Biden’s power will be diminished.
Moreover, there are many parts of the healthcare industry that have attractive long-term growth potential, regardless of the political situation. After all, with the aging of the population — especially the Baby Boomers — there will be ongoing demand for healthcare services.
So then, what are some of the interesting healthcare stocks to consider? Let’s take a look at seven:
With the impact of the Covid-19 pandemic, telemedicine has suddenly become mainstream. Hospitals and health insurers have scrambled to set up systems to deal with social distancing and the surge in caseloads.
The biggest player in the telemedicine category is Teladoc (TDOC), whose origins go back about 18 years. And a key part of the strategy has been acquisitions. Since 2015, the company has spent about $2 billion on dealmaking. This has allowed the company to quickly develop a full-featured platform that handles categories like primary, ambulatory, acute, complex and chronic care. The company has also been leveraging its massive dataset to allow for data-driven insights and AI (artificial intelligence).
The biggest deal, though, was for Livongo Health. The company is a leader in treating chronic conditions. The deal is expected to lead to $500 million in revenue synergies over the next five years.
In terms of the market opportunity, it is enormous for TDOC stock. The company estimates it is at a whopping $250 billion.
Founded more than 40 years ago, Cerner (CERN) is a pioneer in digital technologies for the healthcare industry. Its systems help improve patient outcomes and management of hospital systems. As a testament to the company’s technology prowess, it has more than 500 patents in its portfolio.
The company’s systems handle the data for about 250 million people across the globe and help roughly three million healthcare professionals. For example, it has about 26% market share in the U.S. for acute care hospital EHR (electronic health records) and No. 1 or No. 2 positions in 11 other countries.
During the past few years, the company has been retooling its IT (information technology) infrastructure. At the heart of this has been a migration to Amazon’s (AMZN) AWS (Amazon Web Services) platform.
Yet the biggest driver for CERN stock is the development of its HealtheIntent system, which uses the Cloud to help deliver better care and improve the reimbursement strategies. There are over 1,000 organizations on it, and there are connections to 140 claims and payer vendors. The addressable market opportunity — for both providers and non-providers — is about $77 billion.
Healthcare stocks are not just about humans. There are also enormous amounts of spending on animals!
And the dominant player in the market is Zoetis (ZTS), which has been in business for more than 65 years. The company has a wide assortment of medications, vaccines and diagnostics that cover both companion and agricultural animals.
One of the big advantages of ZTS stock is that the regulations are much less strict for drug approval. Moreover, there is no need to deal with government reimbursement programs.
Note that ZTS has massive scale. The company has 27 manufacturing sites and 300 product lines. It also has 13 blockbusters, which account for about a third of the overall industry (a blockbuster is a drug with at least $100 million in revenues).
Some of the long-term growth drivers for ZTS include global trends like the rise of the middle class and protein consumption, as well as higher demand for animal care. In all, the market size is about $40 billion worldwide.
As surgeries get more complicated, there has been a growing demand for robotic-based systems. These do not replace surgeons — but instead greatly enhance their work.
The pioneer of this industry is Intuitive Surgical, which was founded in 1995. The flagship system is called da Vinci. It is focused primarily on minimally invasive procedures. Keep in mind that — since its launch — it has handled over five million surgeries.
But Intuitive Surgical (ISRG) has another system, which is Ion. It’s targeted at minimally invasive peripheral lung biopsies.
The Covid-19 pandemic has weighed on demand for Intuitive Surgical, as there has been a reduction in elective procedures. Yet the company has continued to generate strong cash flows. And yes, next year the growth should get back on track.
Another positive for ISG stock is the size of the market. It’s estimated at about $18 billion.
Alexandria Real Estate Equities
Among healthcare stocks, the biotech operators can have huge returns. But there are also many that ultimately fail.
Yet there is a safer way to play this sector — that is, by investing in healthcare REITs (Real Estate Investment Trusts). These are owners of offices and facilities — with the income being mostly rents. There are also lucrative tax incentives.
One of the leaders in the category is Alexandria Real Estate Equities (ARE). The company’s portfolio includes 47.4 million square feet of space. And yes, the locations are in areas that are the hubs of biotech innovation like Boston, San Francisco, New York City, San Diego, Seattle and the Research Triangle.
The balance sheet is solid with $3.9 billion in liquidity. There is also a favorable debt structure. Only about 1.5% will come due in 2024.
True, the valuation on ARE stock is not cheap. But this is to be expected for a leader in a growth industry. There is also an attractive dividend yield of 2.5%.
Illumina (ILMN) is the global leader in the sequencing of DNA. No doubt, this has become strategic in the biotech industry. Just look at how genetic approaches have led to the quick development of Covid-19 vaccines from Pfizer and Moderna (MRNA).
As an indication of the strength of the company’s technology and sales capabilities, it holds about 75% of the worldwide market. It is also still in the early stages. In other words, there should be continued growth for ILMN stock for the long haul.
The company has been expanding into new categories, such as genetic-disease diagnosis and non-invasive pre-natal testing. Illumina has also been making smart acquisitions. The latest was for GRAIL, which is focused on early cancer detection.
Granted, there are notable risks with Pfizer (PFE). The company’s drugs are expensive — and could easily come under more scrutiny.
But with the huge success of the Covid-19 vaccine, this may provide some cover for Pfizer. Might it look not so politically savvy to attack the company? Well, it could backfire.
Besides, Pfizer has a long history of dealing with the evolving political currents. What’s more, the company’s innovative use of the mRNA technology for the Covid-19 virus could prove successful with other treatments, such as for cancer and even AIDS.
Pfizer stock is currently cheap as well, making it a great pick when it comes to healthcare stocks. The shares trade at only 13 times forward earnings and the dividend is at 4.14%.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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