Here are two facts about the healthcare industry. First, the services they provide will never go out of style. Second, the industry is challenging to break into given that it is highly regulated. That's why investing in established leaders in the healthcare market can pay off big time.
Let's look at two healthcare giants that have the tools to continue rewarding shareholders for many years to come: Intuitive Surgical (ISRG 2.21%) and Bristol Myers Squibb (BMY -0.30%).
1. Intuitive Surgical
Medical devices giant Intuitive Surgical has struggled amid the pandemic. The outbreak led patients and healthcare facilities to postpone elective surgeries, which harmed the company's top line. Intuitive Surgical generates much of its revenue by selling instruments and accessories that go along with its da Vinci surgical system.
A drop in elective surgeries means a decrease in instruments and accessories sales. And with the omicron variant of the coronavirus now causing a new surge in cases, investors may be worried that these headwinds will continue to impact Intuitive Surgical for much longer than anticipated.
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But these are temporary worries. Riding out the storm with this company is an excellent idea given its long-term prospects. Intuitive Surgical had 6,525 of its da Vinci systems installed worldwide at the end of the third quarter. That number will only keep growing as robotic-assisted surgery (RAS) gains greater adoption. The industry is severely underpenetrated -- only about 3% of surgeries are performed robotically today, according to some estimates.
Intuitive Surgical is already an established leader in this space; it held nearly an 80% market share in 2020. While the company will face increased competition, it has already built a solid moat around its business to maintain a substantial percentage of the market. The da Vinci system costs between $0.5 million and $2.5 million, which is quite an investment for healthcare facilities -- and that's before factoring in the time it takes to train professionals on this machine. These high switching costs make it unlikely that the company will lose most of its clients.
Intuitive Surgical's financial results are healthy, too. In the third quarter, revenue totaled $1.4 billion, up 30% from the prior-year quarter, while adjusted net income came in at $435 million, also up 30% from a year ago. Intuitive Surgical has historically increased its top line at a good clip -- and with a growing, worldwide installed base and an increasing number of procedures, it is likely to continue doing so.
Valuation may be an issue for the company. It is currently trading at about 54 times next year's earnings. But given the enormous opportunities in the RAS market, Intuitive Surgical more than justifies its sky-high valuation metrics. That's why even at current levels, this healthcare stock is a strong buy.
2. Bristol Myers Squibb
Pharma giant Bristol Myers continues to report strong financial results. In the second quarter, it recorded revenue of $11.6 billion, 10% higher than the year-ago period. Revenue growth in the double digits is good for a large drugmaker like Bristol Myers, and it owes this performance to several medicines with fast-growing sales.
As of the nine months ended Sept. 30, no less than seven of Bristol Myers' drugs had already recorded more than $1 billion in sales. That number almost certainly climbed to eight by the end of 2021 although we will have to wait for fourth-quarter financial results to know for sure. Bristol Myers' five best-selling medicines continue to increase their sales at a decent clip.
For instance, in the third quarter, sales of cancer medicine Revlimid increased 11% year over year to $3.3 billion. Opdivo, another oncology product, saw its sales jump 7% year over year to $1.9 billion. Further, anticoagulant Eliquis recorded $2.4 billion in revenue, 15% higher than the prior-year quarter.
Image source: Getty Images.
On the bottom line, Bristol Myers recorded adjusted net earnings of $4.5 billion, up from the $3.7 billion it reported during the year-ago period. Further, the company generated $14.6 billion in free cash flow in the trailing-12-month period. Bristol Myers is running several dozen studies, including at least 40 phase 3 clinical trials. According to some estimates, compounds in a phase 3 study have a roughly 50% chance of earning regulatory approval for the indication they are being tested.
That means we can expect the company to add at least 20 new products (or new indications to existing products) within the next couple of years. After all, the company does have a habit of scoring new regulatory nods that meaningfully contribute to its sales growth. Lastly, Bristol Myers is attractively valued, trading at just 7.7 times its estimated earnings for the next year. At current levels, this drugmaker is a terrific bargain.
