The U.S. won its 100th gold medal in Winter Olympics history this week, and that got us thinking: If there were an Olympics for healthcare companies, who would be the winners?
To find out, we asked The Motley Fool's Industry Focus: Healthcare analyst Kristine Harjes and healthcare specialist Todd Campbell to pick winners across six categories:
- Best dividend stock
- Best financial fortitude stock
- Best marijuana stock
- Best healthcare IT stock
- Best blue-chip biotech stock
- Best international healthcare stock
The duo revealed their picks on this week's show, and while their list includes well-known healthcare heavyweights Johnson & Johnson (JNJ 0.39%) and AbbVie (ABBV 1.01%), some of their other gold medal winners may surprise you.
A full transcript follows the video.
This video was recorded on Feb. 14, 2018.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Wednesday, February 14th, and this is the Healthcare show. My name is Kristine Harjes, and Motley Fool healthcare writer Todd Campbell is joining me on the phone. Todd, first off, Happy Valentine's Day! And also, happy Olympics!
Todd Campbell: Yeah, Happy Valentine's Day to you, too! And yes, I understand that there's this small little competition going on in Korea that I've heard a little bit about.
Harjes: Yeah. I mean, it's not really a big deal, it's just a handful of the top athletes in the world competing in all sorts of winter events.
Campbell: Doing crazy, phenomenal things that I know I could never do even at my peak.
Harjes: Yeah. I have to say, I'm not a big TV watcher, but every time I've been out at a bar or a restaurant since the Olympics have been going on, if it's on the screen, I can't help but watch it. These people are so impressive.
Campbell: One of the things I want to see, I don't know if you got a chance to see it yet, I'm going to have to google for it later, but I heard Shaun White did an unbelievable job winning the gold in the halfpipe --
Harjes: I see Austin nodding out there.
Austin Morgan: The entire U.S. snowboard team has taken gold so far. So, there's that.
Harjes: That's pretty sick.
Campbell: That's amazing. I could see he was doing some 1440s, just amazing stuff. Have you ever snowboarded, Kristine?
Harjes: [laughs] So. I have once, and I will never do it again, because on my very first time snowboarding, I broke both of my wrists.
Campbell: What?!
Harjes: Yeah. [laughs]
Morgan: It's alright. Skiing is for people who can't snowboard.
Harjes: Hey -- no. The switching costs are high. I am a skier. I tried to snowboard once, and I really didn't do well with the whole "my feet are stuck together concept."
Campbell: I feel you. My 15-year-old, he got me to take some lessons, and I spent an entire day trying to figure it out. And on the very last run of the day, I thought I had it and I face planted and must have slid 15 or 20 yards down on the icy snow.
Harjes: Oh, no!
Campbell: And I was like, I'm done. But I didn't break anything like you. Wow!
Harjes: We're going to have to leave all the snowboarding to Shaun White and Austin Morgan. [laughs]
Campbell: And you know what's interesting about Shaun White's victory? That was the 100th gold medal that the U.S. has won over the history of the Winter Olympics. That's a pretty remarkable track record.
Harjes: That's pretty sweet. I didn't know that. So, we want to do an Olympics-themed show today, and talk about, if we could give out gold medals for healthcare companies, what would we give them out for and which companies would win? Todd, do you want to kick us off?
Campbell: Sure. There's so many events at the Olympics. If we tried to create categories for as many events as there are at the Olympics, our listeners would probably never finish the show.
Harjes: Yeah, we would be here all day.
Campbell: Yeah. I picked out three. I think you might have picked out a similar number. Mine, quickly, were: gold medal for dividend stocks, gold medal for marijuana stocks, and gold medal for big blue-chip biotechs.
Harjes: I also have three. I'll be doing a financial fortitude contest, and also a health tech, and also, because the Olympics are international in scope, I'll be picking my favorite international as a non-U.S. healthcare stock. We'll go back and forth, we'll pause for a break in the middle. Do you want to kick us off with a dividend stock?
Campbell: Sure. This was a little bit of a tough competition that was furiously fought. In the end, I ended up awarding the gold medal to Pfizer (PFE 1.65%).
Harjes: It was a real nail-biter.
Campbell: It was a nail-biter, it was. It was right down to the wire, whose foot got over the finish line first. I almost went with J&J, because J&J has such a remarkable track record of increasing its dividend, I think 54 years in a row. But I ended up going with Pfizer for a couple of different reasons. Pfizer doesn't have that same long track record, but if you look at since 2011, when it had to cut its dividend because it had lost patent protection on Lipitor and was trying to conserve cash, but if you look since they did that, they've actually increased their dividend by more than J&J, I think it's about 30% vs. J&J's 27%. With their most recent increase of 6.25%, they're now yielding, I want to say it's 3.7% right now, which of course trounces the market.
A lot of times, you look at high dividend-yielding stocks and you get a little bit nervous. You worry that they're trading at a high dividend yield because they're making up for some other problem. But I don't think that's the case anymore with Pfizer. I think the Lipitor headwind was significant. It really dragged down the company's performance since 2011. But we're now at a point in 2018 where all of the hard work that's been done by Pfizer to cut costs and revamp its pipeline, all of that is about to start paying off. They came out with their goals for 2018, and they think that they're going to go from, they were pretty much breakeven last year, as far as revenue growth. They think this year, the top line is going to grow 4%, and they think their bottom line is going to grow 11%. Now, in a company as big as Pfizer, generating that much additional cash every quarter, that should be very, very dividend-friendly over time. So, they get my gold medal for the efforts they've done over the recent years to put them in a position for growth going forward.
Harjes: Alright, I hear you, but I would feel bad not giving Johnson & Johnson a gold medal for something, because they are a highly competitive company. So, in my next category, I will make the competition financial fortitude, and, of course, give the gold medal to Johnson & Johnson.
I'll start with the obvious. They have a AAA credit rating. They're one of just two companies, the other being Microsoft, that has that rating, which is higher than that of the U.S. government. This is just about the lowest-risk stock that I can think of. They have more than 260 different businesses, they have three different operating segments. If you're a regular listener to the show, I'm sure you can name them with me. It's Consumer Products, Medical Devices, Pharmaceuticals. At the end of 2017, Johnson & Johnson reported $16 billion in cash and short-term investments on their balance sheets, and this was before the change to the U.S. tax code that led to repatriation of $66 billion in foreign earnings, roughly $12 billion of which is immediately accessible. This wouldn't be a J&J pitch if I didn't talk about the dividend. Todd, you already started to talk about it a little bit, and I will elaborate. The company is part of a rare group of elite dividend payers known as the dividend aristocrats. Their yield is currently 2.6%. They have a cash dividend payout ratio of 50%, which is very healthy, and they're in no danger of not being able to raise it annually like they've been doing since 1963. So, to sum up, when it comes to financial fortitude, Johnson & Johnson gets the gold medal.
Campbell: And you know what, Kristine? They generated almost $19 billion in operating cash, so I see why you like that one so much.
Harjes: Absolutely.
Campbell: So, moving on to the next one, the next gold medal I was going to give out is for best marijuana stock. This is maybe controversial, but I don't think so. I think anyone who's been paying attention to what's going on for the last few years knows that there have been significant shifts in America's view toward marijuana, and there's been a lot of different activities, both here in the U.S. and abroad to expand the access, particularly to medical marijuana. I think we have about 30 states here in the U.S. that now have some form of marijuana law on the books, eight of which have passed recreational marijuana laws. Then, if you look north of the border in Canada, they have a national medical marijuana program in place, and they're looking at a national program in recreational marijuana opening up in July.
So, as you can imagine, with tens of billions of dollars per year on black market sales potentially moving into the public sphere, there's been a lot of interest in marijuana stocks and companies that are likely to benefit from it. And while you might say, "Well, what U.S. stocks are best positioned to benefit?" You and I have talked on the show in the past, Kristine, about the U.S. market and some of the hiccups and headaches that people are still facing and enduring in this marketplace. Marijuana is still illegal on a federal level. You can't take the same kind of business deductions that other companies do if you run a marijuana business. There's other concerns with cross-border transactions and banking. So, the gold medal for me doesn't go to a U.S. company. Instead, it goes north of the border to Canada, where I selected Canopy Growth as the gold medal winner for marijuana stocks. I just think they have a significant opportunity to generate some very substantial growth over the course of the next year or two, just from the opening of those recreational markets. And I know, Kristine, you had a great interview with Canopy Growth's CEO recently on one of the podcasts, and I recommend that all of our listeners go check it out.
Harjes: Yeah, I really enjoyed that interview so much, because I think the company is super interesting. There are a handful of fairly large Canadian marijuana stocks, but I agree with you, Todd, that I think Canada is the place to look, No. 1, and No. 2, I do think that Canopy Growth is the cream of the crop.
Campbell: They have 30% market share right now in medical. And it's hard to imagine with all the investments they've made in production that they're not going to be able to maintain a very significant share once the Canadian market opens up. I think that on that interview that you did with him, he had mentioned that there's about 250,000 registered patients receiving medical marijuana in Canada today. And he speculates that we could go a year out, a year and a half out, and have the number of people who are purchasing marijuana climb to 400,000-450,000. If so, you're talking about what some industry analysts think will be a $5 billion market, and that's just in Canada.
Harjes: Meanwhile, if you look in the rest of the world, there's even more opportunity there. In Europe alone, it's estimated that there's a $67 billion market for cannabis. It's just insane how quickly this industry has already grown, and how much expectation there is of future growth. And of course, that expectation is priced into this stock. But, as a company, yeah, I absolutely agree that they are gold medal level.
Campbell: Yeah. For them to win the gold medal again in 2018, though, the proof will be in the profitability. I think that Linton has said that he was purposely delaying turning a profit until the second half of 2018, once those recreational markets open. So, it'll be very interesting to see what happens, especially in the second half of the year, with this company and this stock. But, again, gold medal winner for me.
Harjes: And we're back to the Olympics of healthcare with our next competition, health tech. A very broad category, but my gold medal goes to a company called Veeva Systems. They're the dominant SaaS company in the life sciences space, and their value proposition is consolidating legacy IT systems into a single cloud-based system with add-on applications like event management and marketing territory alignment. It's specifically designed for healthcare companies and meeting industry-specific challenges like clinical trial management, regulatory requirements, data collection and more. Their legacy CRM platform is being used by a seriously impressive list of some of the most important and biggest drug makers out there, and their next phase of growth will come from their Veeva Vault, which is a line of products and data management, as well as expansion to beyond just life sciences, which is something that's pretty exciting and was made at the request of companies in other areas who had heard such great things about Veeva that they wanted to be able to use their offerings, even though they're not healthcare companies. From an investing standpoint, I love the predictability of a subscription business. And I also love that it's super sticky. Once you're in their product suite, it's really tough to get out of it and go to a competitor, even if you wanted to. That gives it a super wide moat.
Campbell: That's a really interesting stock. I think it's awesome that you picked it as a gold medalist. I went back and I started looking at this stock, and it's like, wow, no wonder they've had so much revenue growth and so much are earnings growth. Kristine, since 2010, we've gone from 100,000 trials registered on the clinicaltrials.gov website to 266,000 trials.
Harjes: Dang.
Campbell: Just since 2010. So, there's no wonder that that new Veeva Vault that's helping companies manage their clinical trials is enjoying some pretty rapid growth, I think 50% annualized year-over-year just for that piece of the business. So, even if you have some slowdown in that legacy customer relationship management software business, this Veeva Vault is opening up all sorts of new opportunities for them. It's an exciting time for the company.
Harjes: Absolutely. Alright, do you want to take us to the second to last category of the day?
Campbell: Absolutely. This is a stock that I could have probably chosen as a winner in the dividend category as well, but didn't. For my third pick, I'm giving the best blue-chip biotech gold medal to AbbVie. You and I talked a little bit about this company on last week's show, so I won't go too much in-depth into it. But, one of the reasons that I like this company is that they've really provided investors with a lot of good clarity over the past year into where their business could be going over the course of the next five to 10 years. I think a lot of people have been worried up until now about Humira, which is the company's best-selling drug, it accounts for 65% of their revenue, so they should be worried about patent expiration on that drug. But last fall, the company actually won a very important patent decision that then allowed it to negotiate a non-exclusive license for one of the competitors that would launch a biosimilar to Humira. And that is going to delay the entrance of that biosimilar until 2023. As part of that, they are then able to do a little bit of long range planning and say, we think now Humira sales may grow from $18.4 billion today to $21 billion by 2020. And not only do we get the extra few years of all that revenue, but it gives us extra time to launch other drugs that can more than make up for any fall off in revenue once those biosimilars do make it to market. They have Elagolix, which is an endometriosis drug that's under FDA review, they have data coming soon for Rova-T, which is a solid tumor drug that has billion-dollar potential, and they have two other drugs in autoimmune disease for rheumatoid arthritis and psoriasis that could have $6.5 and $5 billion in peak sales opportunity respectively. Given how much money the company is already generating in operating cash, and the potential to move the needle in the future, I think this is a top-shelf gold medal winner when it comes to big cap biotech.
Harjes: As you mentioned, we just covered this company in even more depth last week, so I'll refrain from adding too many details that might just repeat last week's content. But go check that out, listeners, if you haven't listened to it yet.
Given that one of the central draws of the Olympics is its international flavor, I wanted to end on one final competition for best non-U.S. healthcare stock. For this one, I am giving the gold to Roche, the Swiss drug maker. Roche is already very dominant, and it can boast that it has two of the five best-selling drugs from 2017. These were Rituxan, which brought in nearly $8 billion in 2017, and Herceptin, which generated over $7.5 billion. Rituxan treats both certain cancers and autoimmune diseases, which, it's pretty unique that it does both, and it makes up about 18% of overall sales for Roche. Herceptin, meanwhile, treats breast and gastric cancer and makes up about 17% of sales. And it's important to note that both of these drugs are facing biosimilar competition. But that doesn't worry me, much.
Roche also has a cancer drug called Avastin, which had 2017 sales of more than $7 billion, and it still has patent protection. I'm also particularly excited to watch their anti-PD-L1 drug, Tecentriq, which just hit the market in May of 2016. Their growth trajectory for this drug is pretty incredible. 2017 sales of about $500 million, already tripled from 2016 levels, which is, of course, not a fair comparison because 2016 didn't get the whole year of sales. But, going forward, estimates are for a CAGR, compound annual growth rate, of 77% through the year 2022, bringing it up to annual sales of nearly $5 billion. Roche also has one of the largest R&D budgets of any big pharma, and that should continue to be the case for the next several years. I was on the pipeline page of their website earlier, scrolling through, and I literally got a finger cramp. That's how much they have going on.
Campbell: You know, Kristine, just to tag onto that, I saw that they had 25 label expansions or new drug approval in the E.U. and U.S. last year. 25!
Harjes: Actually, by my count, they have 31 just for Tecentriq. And some of them have expected filing dates this year, which is just incredible. And that's where you see that CAGR of 77% being driven by. Overall, worldwide prescription sales are expected to reach nearly $50 billion by 2022, which is a 4% CAGR. That's pretty good for a company of this size. You made a similar point when you were talking about Pfizer, but once you have such a large base, it's hard to grow much. So, that 4% actually puts them pretty close to the top of its class. It also has a dividend yield of 3.8%, which I think is just the icing on the cake to seal the deal that this is my gold medal finalist for international.
Campbell: And one of the things that's interesting, just to tag onto that, 5% growth since 2012, consistently. It's like, every year, 5% growth. So, maybe this isn't a company that's going to grow by leaps and bounds, but man, the consistency is fantastic!
Harjes: Yeah. I'm really impressed by what they're doing with their pipeline. Go check it out if you want to be as wowed as I was, but go easy on the scrolling finger. That's all we have for you today. If you have awards of your own that you think you'd like to give out or you think we missed, please send us an email at [email protected]. As usual, if you want to send Industry Focus some Valentine's Day love, please head to iTunes and leave us a review. We love getting your reviews and hearing what's on your mind, and also helps us get the show out to new listeners. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Our gold metal producer is Austin Morgan. For Todd Campbell, I'm Kristine Harjes, thanks for listening and Fool on!
