A growing and increasingly longer-living global population makes healthcare one of the most attractive sectors for investors, but I thinkthat genetic research, robotic surgery, and marijuana legalization could be the industry's biggest money-making opportunities. If so, then Illumina Corp.(NASDAQ: ILMN), Intuitive Surgical (NASDAQ: ISRG), and GW Pharmaceuticals (NASDAQ: GWPH) could be smart stocks to buy.
Let's get personal
Researchers are increasingly finding that disease is caused by genetic abnormalities, and often, those discoveries are being made using machines and disposable supplies sold by gene-sequencing giant Illumina Corp.
IMAGE SOURCE: GETTY IMAGES.
Illumina is the largest manufacturer of systems used to sequence genetic code, and it's launching new machines this year that could make gene sequencing quicker and cheaper.
There are more than 7,500 of Illumina's machines installed at customers already, and increasing spending on DNA-driven research projects globally, such as precision medicine initiatives in China and the United States, should provide significant revenue and profit tailwinds for years, if not decades.
The company's machines can cost $1 million, or more, but the company really benefits from the ongoing sale of consumables necessary for these machines to operate. As more machines are deployed, revenue for consumables is growing, and since consumables offer more attractive profit margins, that's fueling earnings growth. Since 2011, Illumina's sales and profit have grown by compounded annual rates of 18% and 21%, respectively.
Although the boom-and-bust nature of research budgets means there will be some quarters that are better than other quarters, I believe Illumina's unlikely to lose its dominant position in this market, and if I'm right, then a trend over time toward medicine that aims to correct genetic abnormalities will provide significant opportunities for Illumina to reward investors. The company's newest machines could accelerate that trend, because they could eventually help lower the cost of sequencing genomes from $1,000 today to $100. The NovaSeq 6000, which costs about $1 million, began shipping this quarter.
Lending a (robotic) hand
Good news! Surgery is getting increasingly more precise, and that's reducing recovery times and improving patient outcomes.
At the forefront of this trend is robotics, and when it comes to robotic surgery, there's no better pure-play stock to buy than Intuitive Surgical.
Using research pioneered by DARPA for use on the battlefield, Intuitive Surgical pioneered the development of sophisticated machines that allow surgeons to control robotic arms when performing many surgeries, including prostate and gynecological procedures. Advances in these robotic systems should significantly expand their use in more procedures in the coming decades.
Today, there are almost 4,000 of Intuitive Surgical's da Vinci robotic systems installed at hospitals, and similar to Illumina, the high cost of these machines is only part of the reason I think Intuitive Surgical's going to be a big, long-term winner.
A da Vinci system can cost a hospital $1.5 million, but the average amount spent on replacement instruments and accessories used in operations is especially lucrative. According to management, every da Vinci procedure can produce up to $3,500 in instrument and accessory revenue. That's a lot of margin-friendly revenue when you consider that over 4 million procedures have been performed with these systems, including 750,000 last year alone. Instrument and accessory revenue totaled $1.4 billion, or about 70% of sales, in 2016.
SOURCE: INTUITIVE SURGICAL.
As robotic surgery systems improve, surgeons become more comfortable with them, and as use expands into new areas, such as colorectal surgery and hernia repair, it wouldn't surprise me if Intuitive Surgical's sales and profit march considerably higher over the coming decade.
Take a deep breath
Overwhelmingly, Americans view on medical marijuana has shifted positive, and as a result, over two dozen U.S. states have passed pro-medical marijuana laws that break down barriers to access.
IMAGE SOURCE: GETTY IMAGES.
While no one knows how a new administration in Washington, D.C. may affect marijuana momentum in the short term, the long-term potential for marijuana to gain ground as a viable alternative medicine is big.
GW Pharmaceuticals could be the drugmaker best positioned to profit from a widespread embrace of medical cannabis. The company's been working on marijuana-based medicines since the 1990s, and it could soon launch its first marijuana derived drug in America.
Last year, GW Pharmaceuticals reported trial results from three separate studies showing that a purified formulation of cannabidiol, or CBD, can reduce the number of seizures experienced monthly by patients with tough-to-treat forms of childhood-onset epilepsy. Specifically, GW Pharmaceuticals showed that patients receiving its Epidiolex experienced about 40% fewer seizures than they did before beginning treatment.
The positive efficacy, plus a safety profile that doesn't seem to be raising eyebrows, suggests that Epidiolex could become an important new drug used by doctors to treat patients who don't respond well to existing epilepsy medications. GW Pharmaceuticals estimates that up to one-third of the 2.2 million epilepsy patients living in the U.S. aren't responding adequately to existing medication.
If the FDA green-lights Epidiolex (management plans to submit an application to the regulator soon), then it can be prescribed by doctors nationwide, regardless of whether medical-marijuana laws have been passed in the doctor's state. That's potentially a huge advantage over medical dispensaries, which only market products without the FDA's blessing in states that have passed laws that are friendly to medical marijuana.
GW Pharmaceuticals isn't stopping its marijuana research with epilepsy, either. The company's studying marijuana cannabinoids in other indications, and while results in the past haven't panned out nearly as well as in epilepsy trials, that doesn't mean programs evaluating it in schizophrenia and autism won't bear fruit.
Because I believe that most Americans will continue supporting access to medical marijuana, and that improving perceptions will remove the stigma associated with its use, the future could prove to be very bright for GW Pharmaceuticals shareholders.
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Todd Campbell has no position in any stocks mentioned.His clients may have positions in the companies mentioned.The Motley Fool owns shares of and recommends Illumina and Intuitive Surgical. The Motley Fool has a disclosure policy.