The words "healthcare" and "value" don't seem to go together in the stock market right now as the sector has been hot in 2017, but that's only if you look at traditional valuation metrics and not the long-term potential.
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While you can still find a few stocks that offer up an attractive price right now, foresighted investors looking for value in healthcare have to have a different mindset and look beyond the obvious. Gilead Sciences (NASDAQ: GILD), Masimo (NASDAQ: MASI), and AbbVie (NYSE: ABBV) provide investors with a combination of good value and good potential.
The growth play that became a value play
Leo Sun (Gilead Sciences): The strength of Gilead Sciences' HIV and hepatitis portfolio once made it a favorite growth play for biotech investors. Unfortunately, Gilead's heyday passed as key HIV patents expired and major competitors entered the hepatitis C market.
Instead of spending its cash on big acquisitions to expand its pipeline and reach new markets, Gilead repurchased a lot of stock ($2.5 billion over the past 12 months) and paid out dividends ($2.6 billion during the same period) to appease nervous shareholders.
It eventually agreed to buy Kite Pharma (NASDAQ: KITE), a maker of adoptive cell therapies, for $11.9 billion. Kite's CAR-T (Chimeric Antigen Receptor T-Cell Therapies) treatment could generate nearly $7.9 billion in sales by 2022 -- which could offset Gilead's ongoing declines in HIV and hepatitis drug revenues.
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Analysts still expect Gilead's revenue and earnings to respectively fall by the double-digits over the next two years. Those forecasts look bleak, but they don't fully include the projected impact of the Kite acquisition, which was announced in mid-September.
Barclays analyst Geoff Meacham recently claimed that Kite's CAR-T treatments could be the beginning of a "third act" that follows up the blockbuster success of its HIV and HCV franchises. Gilead's stock also looks very cheap at 9 times earnings, compared to the industry average of 71 for biotech companies, and its forward yield of 2.6% is supported by a low payout ratio of 22%. Those factors should limit its downside potential, even as its near-term future looks blurry.
Danny Vena (Masimo): Masimo may not be a household name, but the company is the undisputed leader in noninvasive patient monitoring technologies, with a focus on pulse oximetry. That sounds pretty complicated, but it's really quite simple. A pulse oximeter is a small device that clips to your finger to measure the amount of oxygen in your blood -- which you probably saw at the doctor's office the last time you went for a checkup.
This device and others like it provide vitally important information to healthcare providers, and Masimo has more than 1.5 million of the devices at work with medical professionals around the globe.
As the settlement of a recent patent infringement lawsuit, medical device company Koninklijke Philips NV (NYSE: PHG) paid Masimo $300 million, and the two companies have now entered a multiyear partnership to license Masimo's technology and jointly develop products. This move could significantly boost Masimo's revenue since the Dutch company controls more than 50% of the high-acuity monitoring market, and other industry players could soon follow its lead.
In its most recent quarter, Masimo produced revenue of $193 million, a 12% increase over the prior-year quarter. Discounting one-time items, net income grew a sizable 27% as expenses grew by only 4% year over year. The company recently increased its long-term growth projections by a full percent to 8% as the result of this collaboration, while increasing its earnings per share forecast by an additional 6% to $2.80.
All of this while trading at a mere 14 times trailing earnings.
A pipeline to future growth
Rich Duprey (AbbVie): A stock that's regularly hitting new 52-week highs might not look like your typical value stock, but drug manufacturer AbbVie still fits the bill. Its shares go for 23 times trailing earnings and 14 times estimates, putting it on par with the broad market indexes, but with analysts expecting it to enjoy 14% annual earnings growth over the next five years, it's clear there's lots of room for further expansion.
While much focus is rightly placed on AbbVie's Humira, from which the company derives about two-thirds of its $25.6 billion in annual revenue, it's the pipeline of therapies the drugmaker has in its portfolio that really argues in favor of its stock being discounted now.
Imbruvica is AbbVie's second biggest-selling drug with annual sales of over $1.8 billion. It estimates the hematologic oncology drug will achieve $5 billion in sales by 2020 and some $7 billion in peak sales over its lifecycle. It's also investigating dozens of other molecules for treatment of various disorders and illnesses, some with significant potential for success, including Rova-T, an experimental cancer drug, that could reach $5 billion in peak annual sales if approved, and Upadacitinib, a rheumatoid arthritis treatment with expected peak annual sales of $3.5 billion.
Obviously, biotechs carry risks, and AbbVie has paid a lot of money to acquire some of the therapies that ultimately may not pay off for it. Assuming it continues to steward their passage through clinical trial and onto the market, AbbVie's stock price today could look very discounted when looking back on it in the future.
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Danny Vena owns shares of Gilead Sciences. Leo Sun has no position in any of the stocks mentioned. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences and Masimo. The Motley Fool has a disclosure policy.