Healthcare stocks are handily outpacing the S&P 500 index so far in 2018. With the aging demographics in the U.S. and other major countries serving as a significant tailwind, it's possible that healthcare will remain a hot area for investors for decades to come.
We asked three Motley Fool contributors which healthcare stocks they especially like. Their top picks were AbbVie (NYSE: ABBV), Mednax (NYSE: MD), and Xencor (NASDAQ: XNCR). Here's why they think these are three healthcare stocks to buy right now.
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Not as risky as it might seem
Keith Speights (AbbVie): I get why AbbVie might seem like a very risky stock. After all, the company depends on one drug -- Humira -- for roughly 62% of its total revenue. That drug faces biosimilar competition in Europe beginning in just a few weeks. And biosimilars are only four or so years away from hitting the U.S. market. But this big-pharma stock isn't nearly as risky as it might seem.
For one thing, Humira's revenue isn't going to disappear anytime soon. Market research firm EvaluatePharma projects that Humira will remain the world's top-selling drug at least through 2024, with sales of $15.2 billion that year. While that's less than the amount Humira hauled in last year, it's still a lot of money.
More important, AbbVie claims several approved products that are already growing by leaps and bounds. Cancer drug Imbruvica and hepatitis C drug Mavyret are approaching $4 billion each in annualized sales. AbbVie thinks that Imbruvica will generate peak annual sales of around $7 billion within the next few years. Recently approved endometriosis drug Orilissa and leukemia drug Venclexta are also expected to become blockbusters.
Then there's AbbVie's pipeline, which EvaluatePharma ranks No. 2 in the biopharmaceutical industry. The most promising candidates in that pipeline are risankizumab and upadacitinib, immunology drugs that could take the baton from Humira.
AbbVie expects $35 billion in non-Humira revenue by 2025. The company made $28.2 billion last year with Humira in the mix. The stock is trading at less than 11 times expected earnings, making AbbVie one of the best healthcare picks around, in my view.
What parent wouldn't sacrifice for his or her children?
Chuck Saletta (Mednax): As more people are becoming covered by high-deductible health insurance plans, folks have to be choosy on where and how they spend their healthcare dollars. As the nation's largest supplier of maternal/fetal, newborn, and pediatric services, Mednax can receive a decent share of those dollars from parents who are willing to prioritize their kids' care over their own.
From an investor's perspective, Mednax's stock is trading near 5-year lows, despite being priced at a level that indicates there's a decent value in those shares. The company trades at around 11 times its anticipated earnings, and those earnings are expected to grow by nearly 15 percent annualized over the next five or so years.
In addition, as would be fitting for a company that focuses more on the services side of healthcare than the equipment side of it, Mednax has a solid balance sheet backing up its business. Its debt-to-equity ratio is around 0.6, and its current ratio is above 1.5, giving it the flexibility to manage through the ever-changing world of medical reimbursements. In addition, as a large physicians' group with a national footprint, it has bargaining power with insurance companies that many smaller providers lack.
Healthy businesses with decent prospects in crucial industries don't generally trade at bargain prices for very long. As a result, if you believe parents will continue to prioritize their children's needs even as they switch to high-deductible insurance plans, now is a great time to consider investing in Mednax.
A winning formula
Brian Feroldi (Xencor): I'm a big believer in the investing maxim "winners tend to keep on winning." When I look for healthcare stocks to buy, I like to see that the company already has a history of creating shareholder value. One small-cap biotech that has certainly been a winner for investors is Xencor. The company's stock is up more than 400% since its IPO in late 2013, which is a return that absolutely crushes the overall market.
With a market cap of just $2.7 billion, you might assume that Xencor's success is being driven by a single drug. I'm happy to report that is not the case at all. Xencor actually boasts 12 drugs in various stages of clinical development and another handful that are about to enter the clinic. The company's two most advanced programs are currently in stage 3 development and are partnered programs that are being co-developed with Alexion Pharmaceuticals and MorphoSys.
The reason Xencor boasts such a large pipeline even though it's still quite small in absolute terms is because of its innovative XmAb engineering platform. This technology enables Xencor to make minute changes to the structure of antibodies in order to alter their properties for the better. That enables the company to quickly churn out drugs that are more potent, more stable, or longer lasting.
What's exciting about the XmAb engineering platform is that it can be applied to almost any antibody, so it can be used to treat a huge variety of diseases. For example, the company's compounds are already in development to treat HIV, blood cancers, asthma, and more.
Another exciting development is that Xencor's technology has already caught the eyes of big pharma. For example, Novartis recently cut Xencor a check for $150 million to gain international commercial rights to two of Xencor's drugs and to co-develop new products. The deal could net Xencor up to $2.4 billion in total milestone payments plus double-digit royalties on any sales if everything goes according to plan. Those are huge numbers for a business that is currently worth less than $3 billion.
Overall, Xencor's technology looks like it is the real deal, and I believe that it has created a winning formula for investors. That makes it a great stock for healthcare investors to get to know.
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Brian Feroldi has no position in any of the stocks mentioned. Chuck Saletta has no position in any of the stocks mentioned. Keith Speights owns shares of AbbVie. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.