Healthcare stocks on an overall basis aren't keeping up with the broader market indexes' performance. Don't let that fool you, though. Over the long run, healthcare stocks are in a great position to win, thanks in part to aging baby boomers.
We asked three Motley Fool contributors to pick the healthcare stocks they think are great choices to buy right now. They selected Biogen (BIIB -0.63%), CVS Health (CVS 0.14%), and Intuitive Surgical (ISRG -1.31%). Here's what the Fool contributors especially liked about these three stocks.
This top biotech giant has to make a move
George Budwell (Biogen): Biotech heavyweight Biogen is backed into a corner. The company's core multiple sclerosis franchise is headed in the wrong direction, and its closely watched Alzheimer's disease drug, aducanumab, just flamed out in a pair of late-stage studies. Making matters worse, Biogen and Ionis Pharmaceuticals' spinal muscular atrophy treatment Spinraza is also starting to show signs of a pronounced slowdown after a blistering start to its commercial launch.
On a positive note, Biogen's biosimilar franchise has been gaining momentum in recent quarters. But this promising enterprise simply doesn't have the financial girth quite yet to make a material impact on the biotech's top line. Keeping with this theme, Biogen's recent acquisition of the gene therapy company Nightstar Therapeutics for its late-stage choroideremia candidate, NSR-REP1, also isn't expected to move the needle from a top-line perspective anytime soon.
What this all boils down to is that Biogen has to make a bold move soon to bring in additional sources of revenue -- meaning that the biotech should be in the hunt for a bolt-on acquisition fairly soon. The good news is that there are a number of high-value neuromuscular drugs -- and drug candidates in late-stage development -- that would fit the bill nicely.
The only question is whether or not aducanumab's failure will provide enough of a jolt to provoke management into action. The company, after all, knew full well that aducanumab was a high-risk asset, and it still didn't take the steps necessary to blunt the impact of this clinical setback.
The day of reckoning, though, has clearly arrived. Biogen has little choice but to bring in fresh sources of revenue through a sizable acquisition. As such, bargain hunters might want to get out ahead of this upcoming catalyst and buy this beaten-down biotech stock while it remains in the doldrums.
So nice, I'll suggest it twice
Sean Williams (CVS Health): Last month I suggested that value-seeking investors take a closer look at pharmacy giant CVS Health. In March, following another rough month and the addition of the company to my personal portfolio, I'd suggest doubling down.
Although CVS Health is facing the entrance of e-commerce giant Amazon.com into a space with a reasonably small number of competitors, I think there are ample reasons to believe that CVS can come out a winner over the long run. For starters, this is a numbers game that favors CVS. Human longevity has been steadily increasing for decades, and in the U.S., we're seeing baby boomers retire from the workforce. As time passes, these boomers are likely to need prescription medicines in order to remain healthy, which is a multi-decade boon for the company's higher-margin pharmacy business.
CVS also recently completed the acquisition of health insurance giant Aetna, which brings a number of variables to the table. On one hand, synergies between both companies, while occurring slower than Wall Street would have liked, could hit up to $750 million annually by 2020. Furthermore, Aetna's tens of millions of members could easily turn into a loyal base of pharmacy customers in the CVS network. It wouldn't be hard to entice these members to stay under the CVS Health umbrella.
This is also a good time to mention that even though the $70 billion Aetna acquisition was looked at with a lot of head-scratching, it's actually a growth igniter for CVS. Front-of-store sales have very low margins, thus dragging down overall margins for most pharmacy-store operators. Aetna's gross margin is actually higher than CVS' combined pharmacy and front-end gross margin, which means its addition will actually provide a boost to organic growth.
Lastly, the company just makes fundamental sense. At no point over the past decade have you been able to pick up CVS Health for about eight times next year's earnings. At this level, I believe the fear of Amazon disruption has been more than baked in. Tack on a superior 3.6% yield, and you have all the makings of a great healthcare stock that can be held long term.
A big head start in a fast-growing market
Keith Speights (Intuitive Surgical): Check out the large hospitals in a major city near you. The chances are pretty good that at least one of them uses Intuitive Surgical's da Vinci robotic surgical system. And the odds are really good that Intuitive's systems will be used a lot more in the future.
There are two primary reasons I'm so confident in that statement. First, aging demographic trends in the U.S. and in other major countries should increase the volume of operations performed in the types of procedures for which the da Vinci system is most used today. Second, robotic surgery holds the potential to reduce the variability in outcomes that's still a big problem with many surgical procedures.
These factors should also benefit Intuitive Surgical's rivals. The company faces more competition than ever before, with more contenders jumping into the fray. However, I like Intuitive's prospects even with increased competition.
The company's large base of customers has financial incentives to maximize its return on investment with the da Vinci system rather than switch to a competing system. Intuitive's long track record also gives it an advantage in winning new customers. The company's continual innovation should also help keep it on top.
Intuitive Surgical is a company with a big head start in a fast-growing market, and tremendous cash flows. It has an impressive level of recurring revenue (over 70% of total revenue). That's the kind of healthcare stock I think investors can buy right now and hold for years to come.