Investor Peter Lynch is famous for finding investing ideas in everyday life. For investors looking to follow in Lynch's footsteps, the healthcare space is a good place to start, considering everyone needs healthcare at some point. Not every company in the space is one that the average person interacts with, but there are many that are consumer-facing and familiar.
There are three healthcare companies that I think are great investments to buy and hold for the long term. Of the three, two should be familiar to almost everyone. One is less known but addresses a common healthcare need. Let's dig in and see what makes these businesses attractive investments.
Johnson & Johnson
There's probably no more well-known consumer-facing healthcare company than Johnson & Johnson (JNJ 1.18%). It's been in business for more than 135 years and has been a publicly traded company since 1944. Its longevity as a company is due largely to its consumer brands that are likely in everyone's homes today. Its Band-Aid product has been so successful that it has become what we call all adhesive bandages, even when they come from another company.
NYSE: JNJ
Key Data Points
J&J has been in the news recently because this consumer health business has been spun out as its own public company called Kenvue (KVUE 0.46%). Despite being the more well-known part of its business, the brands now under the Kenvue name were only around 16% of J&J's revenues as of the last quarter.
Investors are still a few weeks away from the first earnings report after the spinoff, but the first-quarter results can give a glimpse of what to expect. In Q1, pharmaceutical sales increased by 4% year over year. J&J's pharmaceutical sales are pretty well diversified, with drugs on the market for immunology, infectious disease, oncology, and more. The company also has 11 drugs in Phase 3 trials and another five in Phase 2, which indicates that their pipeline of commercially available products should be strong into the future.
J&J should continue to be the strong business and investment it has been for decades, even without its consumer-facing business. J&J has raised its dividend for 60 consecutive years, making it a Dividend King, and its dividend currently yields 2.9%, which is well above the yield of the overall market.
Moderna
If Moderna (MRNA 0.62%) weren't a household name prior to the pandemic, that changed when the COVID-19 vaccines became available in late 2021. Moderna's vaccine not only was important to the health of the world, but also vital to the health of its business as it was (and remains) Moderna's only commercially available product. A look at Moderna's revenue over the last few years illustrates clearly the impact this had on its business.
MRNA Revenue (TTM) data by YCharts
Luckily for shareholders, Moderna looks to be on track to get some more products to market to supplement its fading COVID vaccine revenue.
Moderna currently has 47 development programs in its pipeline, five of which are in Phase 3 trials. Some of those are variations of the COVID vaccine, but there are some other promising vaccines nearing the end of their trial period. One of those vaccines, for a respiratory virus called RSV, has performed well in trials so far, and the company is already preparing for commercial launch in 2024.
NASDAQ: MRNA
Key Data Points
Moderna is a very different investment than Johnson & Johnson, considering where it is in its business life cycle. However, the COVID-19 vaccine showed that MRNA-based vaccines are viable, and Moderna's extensive pipeline could end up putting the company on a path to sustained commercial success. It may take a long time for this to play out, so a reasonably sized position in its stock and a good dose of patience could reward shareholders.
Outset Medical
For those with end-stage renal disease (ESRD), the only treatment is kidney dialysis, a costly and time-consuming procedure that takes several hours and must be done multiple times per week. The vast majority of kidney dialysis takes place in a hospital or clinic, which is where Outset Medical (OM 2.78%) is trying to disrupt the industry.
Outset sells a kidney dialysis machine called Tablo, which is the size of a small refrigerator and can be operated in the home by the patient. Currently, only approximately 13% of dialysis is done in the home, a statistic Outset hopes to change. Outset sees the at-home dialysis market as a $9 billion market opportunity.
NASDAQ: OM
Key Data Points
Outset is still in the early days of gaining adoption of its Tablo device, but the results so far have been impressive. Patients who use Tablo have reported fewer symptoms when compared to their previous in-clinic treatments, and the device has low attrition and a high rate of patient adherence to the treatment frequency.
The financial results have been strong as well. If the company reaches its 2023 estimated target, revenue from 2019 through 2023 will have grown at a compound annual growth rate (CAGR) of 77%. The company is also starting to see some economies of scale. In the most recently reported quarter, adjusted gross margin was 20.3%. Outset expects that metric to reach the mid-20% range by the end of 2023, and has a long-term goal of 50%.
Outset is one of those companies that is easy to root for because of its potential to improve the lives of patients who need kidney dialysis. From the investing standpoint, the business seems on track to continue to gain market share. This is a riskier investment than Johnson & Johnson or Moderna, but with Outset's early success and large market opportunity, I think the risk is worth the reward.
