Investing in the healthcare sector can sometimes feel like riding a roller coaster, but there's little denying that the sector tends to outperform over time. Over the last 11 years, the healthcare sector has outperformed the broad-based S&P 500 in eight of those years. Furthermore, it was among the three top-performing sectors in five out of those 11 years.
Of course, being a healthcare investor means two things: (1) You'll need to be patient, because drug and device development takes time, and (2) you have to be picky and really do your homework, because there are a lot of companies that won't succeed.
With this in mind, we asked three of our Motley Fool investors to name one healthcare stock they believe could be worth buying right now. Cancer drug developer Exelixis (EXEL 0.39%), generic-drug manufacturer Lannett (LCI), and medical device megacap Medtronic (MDT 0.61%) all made the cut.
Growth and value wrapped up neatly in one biotech stock
Following an incredible two-year stretch that witnessed Exelixis' share price rise roughly tenfold, shares of the specialty drugmaker are off by more than a third since the beginning of the year. While simple profit-taking could be one reason its stock has taken a hit, I suspect two more recent events have taken their toll. Those events are the Food and Drug Administration approval of Bristol-Myers Squibb's (BMY 0.80%) combination therapy of Opdivo and Yervoy for first-line renal cell carcinoma (RCC) -- Exelixis' lead drug, Cabometyx, is approved in first- and second-line RCC -- and the failure of the combination of Roche's (RHHBY 2.17%) Tecentriq and Exelixis' Cotellic in the phase 3 IMblaze-370 trial for patients with advanced colorectal cancer.
While neither of these events is a positive for Exelixis, there are other factors to consider here.
To begin with, Cabometyx has been an absolute star for Exelixis' product portfolio. Cabometyx hit the trifecta in second-line RCC of a statistically significant improvement in overall response rate, progression-free survival and overall survival relative to the placebo. It also beat Bristol-Myers Squibb's combination therapy to approval in first-line RCC following stellar data in the Cabosun study, and looks to be on track for a possible label expansion into hepatocellular carcinoma following a successful phase 3 trial known as Celestial. With strong pricing power, Exelixis has the real chance to see peak sales for Cabometyx top $1 billion a year by perhaps as soon as 2021. Not to mention, combination studies involving Cabometyx and rival therapy Opdivo could lead to a win-win for Bristol-Myers Squibb and Exelixis.
As for Cotellic, it was never going to be a major revenue producer. Before its combination study with Roche's Tecentriq missed the mark, the duo managed to gain approval for the combination of Roche's Zelboraf and Exelixis' Cotellic to treat a type of metastatic melanoma. However, this combo therapy entered a very crowded advanced melanoma space. Even with the potential for label expansion still possible, somewhere in the neighborhood of $300 million looks to be Cotellic's peak annual sales potential. Thus, even a failure in IMblaze-370 isn't the end of the world.
According to Wall Street's consensus for 2021, Exelixis is on pace to nearly triple the sales it generated in 2017, and produce $1.77 in full-year earnings per share. That's good enough for a multiple of around 13, assuming its share price remained static for the next three years. It's rare to find rapid growth with such a low earnings multiple in the biotech industry, but that's exactly what you get with Exelixis.
A bargain price among generic-drug makers
Chuck Saletta (Lannett): The beauty of generic drugs is that as long as people suffer from the conditions they treat, there will be a demand for those products. The downside is that they're generic because the patent protections have run out on them, making them fairly straightforward to produce. Every once in a while -- like we saw last year -- generic pricing power craters as a result, causing prices to fall.
A decline in pricing power generally leads to a drop in revenue, pulling down the stock prices of generic-drug manufacturers. Lannett is no exception to that rule, and its shares currently trade near their five-year lows. That dip in price is providing the potential opportunity for patient investors who are considering buying Lannett's stock right now.
Thanks to that price decline, the company's shares trade at a shockingly low 5.1 times its expected forward earnings. Granted, Lannett's earnings are expected to drop somewhat over the next five or so years, but even then, the company is still expected to survive. As long as generic-drug pricing stabilizes somewhere near current levels and the company survives, this could very well be a great entry point for Lannett's shares.
From a corporate survivability perspective, Lannett has a reasonable debt-to-equity ratio of around 1.4 and a better than 2.5 current ratio, giving it a solid-enough balance sheet to handle some turmoil. Lannett isn't a risk-free investment, as a protracted price war could spell trouble. Still, at today's stock price levels, there's good reason to believe that risk is adequately priced into its shares.
A history of success
Brian Feroldi (Medtronic): There's no such thing as a foolproof investing strategy, but I'm a believer in the theory that putting capital behind companies that boast a history of winning can greatly increase the odds of success.
Take Medtronic as an example. Medtronic is a leading seller of medical devices around the world. The company's products are used to treat a wide variety of disease states such as diabetes, pain, cardiovascular problems, and more.
Medtronic has a long history of developing (or acquiring) devices that become the standard-of-care treatment. That's wonderful news for investors because it can take a long time for a healthcare provider to become familiar with how to use a particular type of medical device. Once they become comfortable with using it, they tend to become loyal to a brand since it would take a long time to learn how to use a competitor's device. That fact helps Medtronic charge a premium price for its products and still retain strong market share.
The beautiful thing about investing in healthcare stocks is that the demand for high-quality products tends to remain robust in good times and in bad. After all, no one gets to choose when they get sick. This fact has helped Medtronic's financial statements to remain strong even in trying economic times and explain how this company has been able to grow its dividend for 40 years in a row.
Looking ahead, market watchers believe that Medtronic's profits will grow in excess of 7% annually over the next five years. While that's not blazing-fast growth, it is a decent number when considering that this company is already huge and is only trading for about 15 times next year's earnings estimates. Adding in a dividend yield of 2% to the mix makes this business all the more attractive.