As far as healthcare stocks go, drugmaker Merck (MRK 0.37%) and medical device expert Intuitive Surgical (ISRG 0.59%) haven't been the best of the bunch this year. Both are lagging the market in 2023. A lot is happening with these companies that is giving some investors cold feet, but there is a lot more that suggests that both remain excellent stocks to invest in despite their unimpressive performances this year.
Let's find out why Merck and Intuitive Surgical could make investors, especially patient ones, richer over the long run.
1. Merck
For a long time, Merck has relied on a single drug to do much of the heavy lifting in driving its sales in the right direction. That drug is Keytruda, which is approved to treat many different kinds of cancer. Keytruda continues to perform well. In the third quarter, its total sales of $6.3 billion increased by 17% year over year. Merck's total sales increased by 7% year over year to almost $16 billion. Its adjusted earnings per share (EPS) was $2.13, 15% higher than the year-ago period.
However, investors are increasingly worried about Keytruda's 2028 patent cliff. That isn't as far away as it seems. True, Keytruda should continue growing its sales until then, but the clock is ticking. Fortunately, Merck is diligently working to replace its crown jewel. One of the company's key assets is sotatercept, a potential treatment for pulmonary arterial hypertension. Merck acquired this candidate through its $11.5 billion buyout of Acceleron Pharma.
Sotatercept, which Merck believes can "change the treatment paradigm for patients suffering with pulmonary arterial hypertension," is currently being considered for approval by the U.S. Food and Drug Administration. This product alone won't replace Keytruda, but Merck has many other candidates, some internally developed and others acquired. The company boasts 30 programs in phase 3 studies and 80 in phase 2.
Further, Merck has been working on a subcutaneous formulation of Keytruda. If it can pull that off, it could extend the medicine's patent exclusivity, at least in this formulation. Plus, other parts of its business are also helping drive growth, most notably Merck's HPV vaccines, Gardasil and Gardasil 9. Their combined sales in the third quarter came in at $2.6 billion, 13% higher than the prior-year quarter.
Another reason to invest in Merck is that the company is a solid dividend stock. Merck's yield of 2.88% is higher than the S&P 500's average of 1.62%, while it has increased its payouts by a decent 32.7% in the past five years. Also, Merck's cash payout ratio is just under 56%, a reasonable number that gives the company enough room for more dividend hikes. Opting for dividend reinvestment, a strategy I highly recommend, could make investors much richer with this stock over the long run.
2. Intuitive Surgical
Intuitive Surgical is a leading maker of surgical robots. However, over the past few years, it has struggled due to the number of procedures performed with its devices seesawing because of the pandemic and subsequent rises in the number of coronavirus cases in key markets. While not terrible, the company's third-quarter results didn't exactly blow investors away.
Intuitive Surgical's revenue of $1.74 billion increased by 12% year over year, while procedure volume for its crown jewel, the da Vinci system, increased by 19% compared to the year-ago period. The company's adjusted EPS of $1.46 jumped by 22.7% year over year. Regardless of its pandemic-related troubles, Intuitive Surgical remains an excellent long-term bet. For one, these issues won't last forever and should eventually subside.
Second, the company is the undisputed leader in the robotic-assisted surgery (RAS) market. It held a nearly 80% share of the market as of 2021, a number that is unlikely to have changed that much since. Further, Intuitive Surgical benefits from an airtight economic moat from several sources, including high switching costs (its da Vinci devices cost between $0.5 million and $25 million) and the patents that protect its creation from the competition.
Moreover, this industry remains underpenetrated. According to Medtronic, a medical device giant looking to challenge Intuitive Surgical in this market, less than 5% of procedures that could be performed robotically currently are. No one knows where that number will peak, but given the advantages of RAS minimally invasive surgeries (patients recover faster thanks to less cutting of the skin), it's safe to say it is far from having peaked. So, Intuitive Surgical still has a large opportunity ahead.
That's why investors should look beyond the company's recent issues and stick with the stock.
