Following the fourth-quarter earnings season, shares in WellCare Health Group (NYSE:WCG), Edwards Lifesciences Corp (NYSE:EW), and IMS Health (NYSE:IMS) are among healthcare's best performers. Shares in each of these companies have soared by double-digit percentages in the past month, and that's no easy feat given its been mostly tough sledding in the sector this winter.
Will their winning ways continue? Find out in this clip from the Motley Fool's Industry Focus: Healthcare podcast.
A transcript follows the video.
This podcast was recorded on March 2, 2016.
Kristine Harjes: Let's hear your 30-second elevator pitch for WellCare.
Todd Campbell: Okay. WellCare gets most of their money from running Medicaid programs, primarily in the South, so Florida and Georgia are its two-biggest markets. Those are non-expansion states, so they don't benefit from the enrollment pop that some of their competitors may. That being said, they've got a very ambitious goal, and it looks like they're starting to deliver on it. That goal is to double their sales over the course of the next five years, and to significantly boost their earnings by growing their margin from 1% today to 2% down the road. Doubling a margin should have a very profit-friendly impact, if you will, on its share price over that period.
Harjes: So I definitely want to hear more about how they're planning on doing that; but first, just for context, can you explain exactly what you mean by expansion state?
Campbell: Sure. Yeah. As part of Obamacare, states could opt in to Medicaid expansion, which would allow Medicaid, basically, to enroll anyone who earned up to 138% of the federal poverty level. Not all states opted in. I think 32 or 33 states decided to expand Medicaid; the remaining states chose not to. As a result, Medicaid insurers operating in states that expanded saw a very large increase in the number of people enrolling in those programs versus non-expansion states, and as a result, that drove their revenue and profit substantially higher. I think it was Kaiser Family Foundation reported double-digit growth in enrollment in the last fiscal year for expansion states, and maybe 5%-6% growth for non-expansion states.
So its important, obviously, to understand that, as investors, where do they get their business, and why is it growing? But in the case of WellCare, I think investors -- I mean, they've driven this stock up 22% in the past month, and in my view, the excitement for that is really tied to the future outlook, the ability to grow its business through mergers and acquisitions, to be able to continue to reach more members in the states they already serve by increasing their star ratings, which is how a lot of people go out and select. They also have a Medicare business; a lot of people go out and select their Medicare plans. But I think this is an intriguing company that's worthy of doing a little more research on for investors.
Harjes: Yeah, they're definitely a niche player with an interesting business model. Let's turn toward Edwards Lifesciences. They're a medical device maker, they do artificial heart valves and transcatheter heart valves in particular. What are you seeing here?
Campbell: Transcatheter heart valves are -- the procedure growth is enormous. Essentially, what we're talking about here is, we're talking about replacing heart valves in seniors or elderly patients that wouldn't qualify for open-heart surgery because of other complications they may have.
Harjes: How big of a market is that?
Campbell: It's -- I mean, it's sizable enough that this is a company that's bringing in over $1 billion in sales. You've got the company reporting $671 million in Q4 sales worldwide alone. So it's a $2.4 billion run rate, $2.5 billion in 2015. And it's growing tremendously.
Harjes: Yeah, it sounds like a pretty niche-y kind of tool. It's used for just these people with high-risk circumstances. But then, you think about it, heart disease is America's No. 1 killer. So this is an absolutely massive market to begin with. So even once you narrow it down to just patients that fit a certain criteria, it's still a pretty big market.
Campbell: Right. And from an investment standpoint, you've got a fairly large market, they've got plans to try and expand this to people who are at less risk, I guess, moderate-risk patients, if you will. So you could get patient volume-procedure growth that way; that would drive sales and revenue higher. And you've got a company that has a really good balance sheet. I think they have $1.2 billion in cash, and about half that in debt. They've beat earnings expectations in each of the last four quarters, and they're thinking that their earnings could continue to grow substantially this year.
Harjes: Is that anything to do with the recently implemented two years of suspension of the U.S. Medical Device tax?
Campbell: That's going to provide a tailwind. Yeah, in December, it was agreed to suspend that, or delay that, or however you want to phrase it, the 2.3% tax that was implemented as part of Obamacare on medical device makers. So you get a nice, natural tailwind there. But again, they've got a substantial double-digit uptake increase in sales for their transcatheter valves. And they've got the market share dominant in Sapien product for that treatment. So this is one of those situations where, I think, again, investors are saying, "We've got a company that's growing double digits, we've got a solid balance sheet, we've got a solid opportunity for future growth, I think that makes this a stock that's worthy of people's attention."
Harjes: Okay, let's move on to our third and final stock, IMS Health Holdings, which is up 13% in the last month.
Campbell: Correct. IMS Health may not be well known among the average investor, but anyone who is in the healthcare industry is probably familiar with them. They're a huge provider of information content across the health industry. Basically, if a drug maker has a drug, and they want to know how it's performing in the marketplace, or they want to figure out how better to reach doctors and educate them on the benefits of their drug, they're going to be working with IMS to find out that information, analyze that information, and then develop strategies to go after and grow market share. In the last year, this is a global company, so there's been some currency headwinds. Sales are up 20% -- 28% if you adjust back out the currency.
So I think you look at this company and you say, "Well, are more drugs getting approved every year? Yes. Is the patient population for medicine increasing? Yes. Are companies more and more interested in figuring out how to drive market share growth? Yes." So I mean, all of these are tailwinds that could help IMS continue to grow into the future. That being said, it's been an acquisitive company. They do have some debt that investors should be aware of, and of the three, this one is maybe my No. 3 choice to consider for portfolios. But that being said, take a look at it, and check it out, because shares have maintained their rally over the course of the last month since the report, and content is important. It's key.
Harjes: So if these guys are your No. 3 out of the three we just discussed -- and I'll end with this question -- which one is your favorite pick?
Harjes: (laughs) That was easy.
Campbell: It has the greatest opportunity for growth, it has reasonable valuation, the bottom line is growing nicely. I think they've got a really good market opportunity, really good market-leading product. And then, I would look to WellCare. Then I would look to IMS.
Harjes: Alright, that was a high-conviction answer, I like it.
Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.