Are you worried about healthcare-sector stocks?
Considering their performance lately, some nervousness is understandable. The S&P 500 index has climbed 9.8% higher over the past 12 months, but the iShares U.S. Healthcare ETF rose just 0.4% over the same period.
Shares of health-related businesses have been underperforming the broad market, but not across the board. In fact, these healthcare stocks recently announced increased expectations for their bottom lines.
|Company||12-Month Stock Price Gain (Loss)||Previous 2019 Adjusted EPS Guidance Range||Current 2019 Adjusted EPS Guidance Range|
|Edwards Lifesciences (NYSE:EW)||58%||$5.20 to $5.40||$5.50 to $5.65|
|Thermo Fisher Scientific (NYSE:TMO)||33%||$12.16 to $12.22||$12.28 to $12.34|
|Alexion Pharmaceuticals (NASDAQ:ALXN)||(14%)||$9.65 to $9.85||$10.25 to $10.40|
Of course, these three businesses are raising expectations for different reasons. Let's take a look at why they're so optimistic before diving any deeper.
1. Edwards Lifesciences: The beat goes on
This medical device maker's transcatheter aortic valve replacement (TAVR) devices make open-heart surgery look medieval. A high level of safety, combined with a shape that doesn't block access to the coronary artery, has made the Sapien 3 valve replacement system extremely popular even among patients who could probably handle a valve replacement surgery.
In the U.S. alone, around 400,000 people per year find out they have an aortic valve that leaks or doesn't close all the way. Edwards expected a significant percent of valve-replacement candidates would receive a Sapien 3 valve instead of surgical valve repair, but the rapid pace of adoption caught everyone off guard.
Third-quarter sales surged 21% year over year to $1.1 billion, and clinical trial results released at the end of the third quarter could push sales in Edwards' TAVR segment through the roof. During the year-long Partner 3 study, inserting a Sapien 3 device reduced patients' risk of rehospitalization, stroke, and death by 46%, compared to surgical valve repair.
At recent prices, Edwards Lifesciences stock has been trading at around 22.9 times this year's earnings expectations. That's awfully cheap for a company that's growing its top and bottom lines by double-digit percentages.
2. Thermo Fisher Scientific: All roads lead here
If you've ever set foot in a laboratory, you're already familiar with Thermo Fisher's flagship brand of basic equipment, reagents, and consumables. Whenever you hear about a biotechnology start-up raising heaps of capital, you can be sure that a significant chunk of that money will reach this company's income statement.
Thermo Fisher also offers an increasing array of services to the life-sciences industry, including viral vectors for gene-therapy developers and next-generation gene sequencing services. All segments reported some sales growth in the third quarter compared to the previous-year period, and the high-margin life sciences solutions segment led the way.
Third-quarter sales from the company's life sciences segment rose 13% year-to-year to $1.7 billion, and produced an impressive $586 million in operating income. The life-sciences industry is highly fractured, and Thermo Fisher Scientific is generating enough cash to expand its commanding position much more through acquisition. In the first nine months of 2019, free cash flow grew 7% year over year to $2.4 billion.
At 23.8 times this year's earnings expectations, Thermo Fisher isn't as cheap as Edwards Lifesciences. With multiple avenues to growth, though, Thermo Fisher is far less likely to stick you with heavy losses.
3. Alexion Pharmaceuticals: On sale
Alexion's portfolio of rare-disease drugs is heavily dependent on one product, Soliris, which is getting closer to losing its patent-protected market exclusivity. A longer-lasting version, Ultomiris, launched in the U.S. last year; switching patients from Soliris to Ultomiris has been even easier than expected.
Sales of the company's new treatment reached an annualized $360 million in the third quarter as a treatment for paroxysmal nocturnal hemoglobinuria, a rare immune disorder that leads to rampant destruction of red blood cells. Shortly after the third quarter ended, the FDA expanded Ultomiris' addressable population to include patients with another potentially fatal disorder called atypical hemolytic uremic syndrome (aHUS).
The main patent protecting Soliris' U.S. market exclusivity expires in 2021, but usage and formulation patents will probably keep biosimilar competition at bay until 2027, though Alexion shareholders would like its exclusivity to last much longer. A recent approval to treat a rare cause of blindness and generalized myasthenia gravis has led to a surge of new patient starts; third-quarter Soliris sales rose 12% to an annualized $4.0 billion.
At recent prices, Alexion has been trading at an ultralow valuation of just 10.2 times this year's expected earnings. That's because investors are nervous about Soliris revenue quickly drying up before the company can switch patients to Ultomiris.
Hard to pick a favorite
Investors nearing retirement need to protect their principal, and shouldn't go near relatively risky stocks like Alexion and Edwards. Luckily, Thermo Fisher Scientific's command of an otherwise fractured market, plus a wide array of products and services, makes it one of the safer bets you can make right now.
If you're not worried about adding growth stocks like Alexion and Edwards to your portfolio, though, either would be a good choice. Simply continuing along their present paths could be enough to deliver market-crushing gains in the years ahead.