These Healthcare Stocks Should Thrive in 2022
Pharmaceutical and health sciences firms are riding powerful demographic trends amid a golden age of innovation.
As the COVID-19 pandemic recedes, routine doctor and hospital visits, along with deferred medical procedures such as cataract surgery and heart valve replacements, are returning to normal.
The pandemic has been a global tragedy, but if there is one silver lining it is that the miraculous development of effective COVID-19 vaccines in less than a year is helping to usher in a golden age for the pharmaceutical and health sciences industries.
"We're seeing a revolution today in vaccine development," says Andy Acker, manager of Janus Henderson Global Life Sciences.
Before COVID arrived, the fastest vaccine approval had been four years, and the average was 10 years; with COVID, two vaccines were approved in about 10 months. Validation of the mRNA technology used by Pfizer (PFE) and Moderna (MRNA) in their vaccines means that it will now be adopted to treat other medical indications. (The mRNA vaccines teach our cells how to make a protein that triggers an immune response.)
In truth, the COVID-19 medical challenge and the dramatic success of the vaccines have only served to accelerate a powerful trend of innovation in medicine. For instance, the sharply declining cost of gene sequencing is pushing forward the growing field of precision medicine, which aims to tailor treatments to specific diseases, such as cancer.
"The science is exponentially improving for better outcomes," says Neal Kaufman, manager of Baron Health Care fund.
Of course, the healthcare sector is also riding the (global) demographic wave of aging populations. At CVS Health drugstores, the number of prescription medicines purchased by people age 65 or older is three to four times that of 20- to 40-year-old people, says Jason Kritzer, comanager of Eaton Vance Worldwide Health Sciences.
In rapidly developing countries with expanding middle classes, such as China, quality healthcare is likely to be one of the first things people rising out of poverty will spend money on.
With innovation and some of these secular trends in mind, we identified six intriguing healthcare stocks that literally span the alphabet, from letter A to letter Z. We particularly like companies that address large and growing end markets, especially global ones. We give extra points to businesses that have less exposure to pricing pressure from insurance companies or the government. Returns and other data are through Nov. 5.
Share price: $687
Market cap: $54 billion
Price-earnings ratio: 50
Maker of the Invisalign brand of clear, plastic braces for teeth, Align Technology (symbol ALGN) is a disruptive force in the global teeth-correction market, rapidly gobbling market share from traditional wires and brackets. Jeff Mueller, comanager of Polen Global Growth, credits the “Zoom effect” for accelerating the adoption of the aesthetically pleasing aligners: Workers stuck at home during the pandemic were staring at their own teeth every day on Zoom. “Vanity is increasing around the world,” Mueller says, adding that, due to the rise of smartphones, the internet and social media, “more people are taking pictures of themselves than ever before in the history of mankind.”
A lot of technology is used in the Invisalign process. It employs intra-oral scanners and modeling software, plus mass-customization manufacturing using 3D printing at several plants around the globe (each set of teeth is unique, and individuals change their aligners every two weeks). Because braces are generally for cosmetic purposes, they are not subject to pricing pressure from insurance companies or the government.
Align Technology’s revenues are currently growing by 25% to 30% a year as its market penetration rises, and Mueller expects earnings to continue to compound at double digits for quite a while.
Share price: $82
Market cap: $206 billion
Price-earnings ratio: 11
Dividend yield: 3.2%
CFRA analyst Sel Hardy thinks that Merck’s (MRK) COVID-19 antiviral pill, molnupiravir, is “a game changer.” The drug maker has applied for emergency-authorization use from the government; approval was expected before the end of 2021. Merck projects that global sales of the oral medication, which has demonstrated strong efficacy against multiple variants of COVID, could be $5 billion to $7 billion by the end of 2022.
Apart from this breakthrough drug, Hardy likes the way Merck is positioned. Sales of Keytruda, its versatile oncology drug, topped $14 billion in 2020 and continue to grow; its animal health division is expanding; and the firm’s $12 billion acquisition of Acceleron Pharma, a biotech firm with strengths in blood and cardiovascular treatments, will augment Merck’s product pipeline.
Hardy thinks Merck, which yields 3.2%, can compound earnings by at least 10% a year for the next three years.
Share price: $113
Market cap: $259 billion
Price-earnings ratio: 31
Dividend yield: 1.3%
Danish pharmaceutical company Novo Nordisk (NVO) focuses on two global pandemics: diabetes and obesity. The World Health Organization projects that the number of diabetics will expand from 460 million to 580 million by 2030, and it estimates that there are nearly 800 million obese people around the world. Novo pioneered insulin injections a century ago and has remained a global leader in diabetes care ever since. Multibillion-dollar drugs include Ozempic, a once-weekly prescription for adults with Type 2 diabetes to lower blood sugar, and NovoRapid, a fast-acting insulin treatment. Novo’s sales are evenly split between North America and the rest of the world.
Investors such as Samantha Pandolfi, comanager of Eaton Vance Worldwide Health Sciences, are also excited about rapid growth in Novo’s newer weight-management business. Wegovy, prescribed for obese people with another disease, such as diabetes, was approved by the FDA in June 2021. Tests show Wegovy typically delivers a weight loss of 15% to 17%, and Pandolfi says sales are off to a blazing start. The century-old firm plows an impressive 12% of sales back into research and development, which helps it stay ahead of the competition and generate earnings growth in the low double digits.
Thermo Fisher Scientific
Share price: $617
Market cap: $243 billion
Price-earnings ratio: 29
Dividend yield: 0.2%
Eddie Yoon, manager of Fidelity Select Health Care Portfolio, calls Thermo Fisher Scientific (TMO) “the Walmart of life sciences.” Whether it’s a big pharma, biotech or university lab, customers come to this health sciences supermarket for analytical tools, lab equipment and services, and diagnostic kits and consumables. “They are the partner of choice for any pharma or biotech company of any size,” says Jeff Jonas, a portfolio manager at Gabelli Funds. Thermo has benefited from increased demand for its products and services due to COVID-19, and now the firm is poised to benefit from the rise in research and development spending among drug companies around the world.
One thing that distinguishes Thermo, according to health care stock analysts, is the quality of its management. The firm has successfully integrated several strategic acquisitions that helped broaden its menu of products and services. Tommy Sternberg, an analyst at William Blair, notes that Thermo is particularly adroit at staying close to customers and understanding what their scientists are working on. “They do a fantastic job of getting to know customers and their needs, and learning from customers to come up with more solutions more quickly,” says Sternberg.
Share price: $456
Market cap: $429 billion
Price-earnings ratio: 21
Dividend yield: 1.3%
The U.S. spends a staggering $4 trillion a year on health care. UnitedHealth (UNH)—with annual revenues of nearly $300 billion, a market value of $430 billion and 330,000 employees—is the industry’s largest player. As the top private health care insurance provider, it leads in managed care. Its OptumHealth unit offers pharmacy benefits and owns physician’s practices and surgical centers. Eaton Vance’s Kritzer calls Optum, an industry leader in the digitization of services, “a very large health IT company inside an insurance giant.” United helps the federal government manage costs through its Medicare Advantage plan (the most popular private plan). Plus, it enjoys high customer satisfaction, and it is counting a growing number of seniors as customers (about 10,000 Americans turn 65 every day). Despite United’s massive size, William Blair’s Sternberg thinks it can sustain earnings-per-share growth of about 15% annually.
Share price: $217
Market cap: $103 billion
Price-earnings ratio: 42
Dividend yield: 0.5%
Like Align Technology’s Invisalign, Zoetis’s (ZTS) main business—companion-animal health—was already riding a tailwind that picked up force thanks to lifestyle changes during the pandemic. Pet-ownership rates spiked as people grew more isolated and sought the companionship of dogs and cats, according to David Kalis, comanager of The Future Fund Active ETF. Zoetis markets vaccines, prescription drugs and diagnostic equipment directly to veterinarians. The industry is regulated, with FDA approval required for the drugs, but Zoetis benefits from the lack of insurance company price pressures and the fragmented nature of the firm’s customer base, notes Eaton Vance’s Pandolfi.
In fact, companion-animal ownership is growing globally, driven by aging populations and shrinking family sizes. Pet owners are treating their pets better, addressing ailments such as skin irritation and arthritis, and visiting the vet more frequently, says Pandolfi. Zoetis books about half of sales overseas; roughly 60% of revenues come from the companion-animal business and 40% from the less-profitable and slower-growing livestock animal division.
Invest in a Fund
Given the complexity and diversity of the health care sector, investing in a fund makes a lot of sense for many investors. Here are our favorites (returns and other data are through November 5).
Baron Health Care (symbol BHCFX, expense ratio 1.10%) is a young fund off to a sizzling start. Over the past three years, it returned 29.2% annualized, or nearly twice the return of the S&P 1500 Health Care index. Manager Neal Kaufman and assistant manager Joshua Riegelhaupt look for innovative, fast-growing companies. The largest holding is Natera, a clinical genetic-testing outfit.
Fidelity Select Health Care (FSPHX, 0.69%) is a member of the Kiplinger 25, the list of our favorite no-load funds. The fund has a 19.8% three-year annualized return, ahead of the 17.0% average annual gain of its peers. Eddie Yoon, who has piloted the fund since 2008, says he’s light on large pharmaceutical companies in the portfolio, preferring makers of devices used to help manage chronic diseases such as diabetes and heart ailments. The fund’s top three holdings are UnitedHealth, Boston Scientific and Danaher.
Ziad Bakri, a former physician, runs T. Rowe Price Health Sciences (PRHSX, 0.76%), which has returned 21% annualized over the past three years. Nearly one-third of assets are invested in biotechnology, a high-risk, high-return segment of health care. Top positions include Thermo Fisher Scientific and Intuitive Surgical.
If you prefer investing through exchange-traded funds, Simplify Health Care (PINK, $26, 0.50%) is an intriguing, actively managed ETF that launched on October 7. Through November 5, just shy of one month, it returned 5.9%. Manager Michael Taylor, a virologist by training who spent 20 years investing in health care stocks at some prominent hedge funds, expresses his views by increasing or decreasing the fund’s weighting of stocks in relation to the MSCI US Health Care Index.
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