Even with the potential for prescription drug pricing reform in the United States, the healthcare sector is still expected to grow by high single digits every year for the next five years, according to a report by EvaluatePharma. The immense demand for groundbreaking new products, an aging global population, and broader insurance coverage in general are all expected to fuel the sector's growth for years to come.
Which healthcare stocks are best-positioned to capitalize on this rising tide? We asked three of our Motley Fool contributors this question and they picked Johnson & Johnson (NYSE: JNJ), Intuitive Surgical (NASDAQ: ISRG), and Iovance Biotherapeutics (NASDAQ: IOVA). Read on to find out why each of these top healthcare stocks looks like a great buy right now.
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Top of the class
George Budwell (Johnson & Johnson): Healthcare giant Johnson & Johnson has had an outright terrible year from a public image standpoint. J&J's carefully crafted image has taken a sizable hit thanks to its baby powder scandal, as well as a multibillion-dollar lawsuit over the company's alleged role in the opioid crisis in the state of Oklahoma.
Despite these legal headwinds, though, J&J's shares have still managed to trade in lockstep with the broader healthcare sector over the first half of 2019. At the time of this writing, for instance, the healthcare titan's shares have generated total returns of 11.6% so far this year (including dividends). This double-digit return on capital in less than seven months' time -- amid two high-profile legal scandals, slowing top-line growth, and political blowback over prescription drug prices in the United States -- is a testament to J&J's resiliency as a growth vehicle.
Why is J&J's stock seemingly bulletproof? Three reasons. First off, J&J has now raised its dividend for 56 straight years, making it a Dividend Aristocrat. Second, the company sports a triple-A-rated balance sheet, even though J&J is one of the most aggressive among large-cap healthcare entities in terms of pursing internal and external growth opportunities. Third, J&J has one of the best clinical pipelines in the business, which has kept the company from suffering any major setbacks on the revenue front over the last decade.
Bottom line: J&J has proven that its stock can perform admirably even under extremely adverse business conditions. And that's the kind of staying power that should appeal to any type of investor.
The three Rs
Keith Speights (Intuitive Surgical): You've probably heard of the "three Rs" -- reading, writing, and 'rithmetic. I think Intuitive Surgical claims three Rs that are more intriguing: robots, recurring revenue, and really great growth prospects.
The robots I'm referring to are the company's robotically assisted surgical systems. Intuitive's da Vinci system is used in hospitals throughout the world. The company also recently launched its new Ion system, which enables minimally invasive lung biopsies. Intuitive is the clear industry leader in robotic surgical systems, with an installed base of nearly 5,000 systems and a track record that goes back two decades.
Intuitive Surgical's razor-and-blades business model gives it tremendous recurring revenue representing 71% of total revenue last year. This recurring revenue is likely to increase even more in the future as more customers lease Intuitive's robotic surgical systems.
What about those really great growth prospects? I think there are three main growth drivers for Intuitive. Demographic trends work to the company's favor, especially with older individuals requiring more surgical procedures that can be performed using da Vinci (or Ion). The expansion of the types of procedures for which robotic surgical systems can be used should fuel growth for Intuitive. The company also has significant opportunities to expand internationally.
Intuitive will face more competition in the future. But I think the company is in great shape to survive and thrive for a long time to come. I continue to view Intuitive Surgical as a top healthcare stock to buy.
A new approach to battling solid tumor cancers
Todd Campbell (Iovance Biotherapeutics): Chimeric antigen receptor T-cell approaches are improving response rates in blood cancer patients, but researchers have had less luck boosting response rates in solid tumor cancers because it's tougher to penetrate the solid tumor microenvironment with a robust enough immune response.
Iovance has a different approach that may overcome this obstacle. Its tumor-infiltrating lymphocytes (TIL) strategy involves harvesting lymphocytes that have overcome the odds and penetrated a patient's solid tumor so they can be grown into the billions ex vivo. Once they've grown enough of them, they're returned to the patient so they can attack the solid tumor.
Clinical trial data unveiled this month by Iovance suggests the approach may work. In second-line or later cervical cancer patients with limited treatment options, Iovance's LN-145 elicited an objective response rate of 44%, including an 11% complete response rate. The median duration of response (DOR) had not been reached as of the 7.4 month follow-up, suggesting responses could prove longer-lasting than existing alternatives.
Iovance also said recently another TIL, lifileucel, elicited a 38% response rate in advanced melanoma, an indication also in need of more treatment choices.
Granted, there's no guarantee future data will confirm these results, but the news is encouraging nonetheless. Management anticipated results that could support an FDA application for approval in melanoma in 2020, and following the performance in cervical cancer, it plans to determine the best path forward in that indication soon.
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George Budwell has no position in any of the stocks mentioned. Keith Speights owns shares of Intuitive Surgical. Todd Campbell owns shares of Intuitive Surgical. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.