Healthcare is a huge sector, and you can find any kinds of stock you want in it -- fast-growing tech stocks, dividend plays, internet disruptors, or safe places to stash your money in a bear market.
Perhaps you're interested in healthcare companies with high profit margins. Here's why three Fool.com contributors are bullish on Doximity (DOCS -0.85%), iRadimed (IRMD -1.09%), and Gilead Sciences (GILD 0.12%).
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A steal at these prices
Taylor Carmichael (Doximity): Doximity is my favorite internet healthcare play because the company is highly profitable (45% profit margins), and it has three different verticals to drive growth. The most exciting one is the company's telehealth offering, Dialer. On Aug. 4 the company reported that 360,000 health practitioners used Dialer this quarter to meet with patients online. Perhaps even more phenomenal, that's an average of 200,000 patient calls on Dialer every workday.
Over a third of American doctors subscribe to Dialer. Since 80% of physicians in the U.S. are on Doximity's platform, I expect the number of physicians using Dialer to grow over time.
Another major vertical for Doximity is its advertising business. Big pharma spends a lot of money every year marketing drugs, and all of the physicians' eyeballs on Doximity's platform are incredibly valuable. The company did 25 return-on-investment (ROI) studies for clients in the quarter, and its median returns were over 10 to 1.
Doximity reported a net retention rate of 139% in the quarter, and a 145% number among its top 20 customers. By far the largest part of revenue -- 87% -- comes from 273 customers that each paid $100,000 or more in subscription fees over the last year. The company estimates that its customers spend about 25% to 30% of their ad budgets digitally -- and it believes this number will increase to 50% over the next decade, thanks to that outstanding ROI.
I believe Doximity will continue to cement itself as the cloud resource for physicians. Dialer will be a huge revenue generator over time. And more and more pharmaceutical ad dollars will try to reach all those doctors via the platform. At $36 a share, this stock is a screaming buy.
Helping patients get the tests they need
Patrick Bafuma (iRadimed): Unfortunately, magnetic resonance imaging (MRI) machines are often tucked away in the depths of hospitals, so patients often face a lengthy journey to make it there and back. To make matters worse, the vast majority of IV infusion pumps and patient monitoring systems are not MRI-compatible. These obstacles cause delays in imaging for some of the sickest patients in the hospital.
Fortunately, iRadimed is the leader in the development of MRI-compatible devices. Specifically, it is the only known provider of a nonmagnetic IV infusion pump system, as well as nonmagnetic patient monitoring systems. That allows each of these devices to be used near an MRI machine. It also means that critically ill patients can get the monitoring and imaging they need in a timely fashion: talk about mission-critical.
Not only did this founder-led medical device company report a gross profit margin of 79.7% for Q2, but it was able to actually raise its margin from 76.2% in the same period a year ago.
This is in addition to reporting its third consecutive quarter of record revenues. In fact, IRadimed has grown revenue sequentially every quarter since Q2 2020 -- when COVID-19 temporarily thumped sales. And with a strong backlog of orders going into the second half of the year, and guidance for another record quarter in Q3, the growth doesn't seem to be stopping anytime soon.
A money-printing machine
George Budwell (Gilead Sciences): California-based biotech Gilead Sciences is one of the most profitable companies in the entire healthcare sector, and it has been for a long time. The biotech's diverse mix of anticancer drugs and therapies, game-changing HIV medicines, and hepatitis C treatments have been averaging gross margins in excess of 78% (across the company's entire portfolio) so far this year. When the biotech's hep C drugs were at their peak during the middle of the last decade, Gilead's gross margins topped 88%. By contrast, the average gross margin for healthcare products overall is a much more modest 56.4%.
Gilead's eye-popping product gross margins do reflect the company's enormous risk profile, however. Over the past decade, for instance, Gilead has lost billions of dollars on ill-fated research and development projects, licensing agreements that turned into dead ends, and acquisitions that failed to live up to expectations. This is the cost of doing business in the risky world of biopharmaceuticals.
Biopharma companies, in fact, tend to cite this very reason as the main cause behind sky-high drug prices in the United States. Speaking to this point, a recent study found that the average cost to bring a drug to market ranged from a low of $314 million to a high of $2.8 billion.
Regardless of which estimate is correct, it's exceedingly expensive to shepherd a novel compound or biologic therapy from the bench to the pharmacy shelf. And this is doubly true when it comes to the development of breakthrough biologics such as Gilead's anticancer cell therapies Yescarta and Tecartus.
Put simply, Gilead's high profit margins on approved products aren't unreasonable when the cost of development -- along with the cost of clinical failures -- is factored in.
