While pharmaceutical companies may be the first ones to come to mind when you think of healthcare investing, medical technology is at the forefront of innovation in far more areas than just consumable drugs. And these healthcare stocks have just as much — if not more — upside potential in the years and even decades ahead.
MRI scanners, radiation treatment solutions, renal care, mammograms, and pretty much anything involving machines qualifies as medical technology. In and of itself, it is expansive, covering diagnostic, monitoring and treatment technologies that offer less invasive options at lower cost.
There is also a high-tech element to a number of newer companies that focus on the analytics side of healthcare companies. Whether in payments, back-end processing or customer management, healthcare companies rely on technology to streamline and improve existing software systems.
Hardware or software, both categories offer investors opportunities for sizable gains. In no particular order, then, here are seven healthcare stocks to buy now.
Cutting-Edge Healthcare Stocks to Buy: Varian Medical Systems (VAR)
Varian Medical Systems, Inc. (NYSE:VAR) manufactures medical devices and software for treating cancer and other medical conditions with radiotherapy, radiosurgery, proton therapy and brachytherapy (insertion of radioactive implants directly into tissue) medical devices. Oncology is an area with significant momentum and strong demand for devices that deliver treatments more effectively.
From a specialty standpoint, you could say Varian focuses on the right spaces. As Kolleen Kennedy, President of Varian’s Oncology Systems, emphasized:
“The global cancer challenge is enormous. It is expected that there will be 24.6 million cancer cases diagnosed annually by 2030, and there is an acute shortage of equipment and trained clinicians.”
To that end, Varian delivered a new technology platform in Halcyon. VAR debuted Halcyon — a high-quality radiation therapy solution that has been streamlined but is priced normally at $2 million-$4 million range — at the Estro conference in May. By the middle of the year, VAR already had five orders for the system.
Varian’s innovation focuses on simplifying and automating the user experience. Success with Halcyon has proven that its focus on “human centered design” is paying off. Its technology proposition across all products should continue to be highly sought after by treatment centers in all geographies.
Cutting-Edge Healthcare Stocks to Buy: Veeva Systems (VEEV)
Veeva Systems Inc (NYSE:VEEV) has trounced the bears and ridden to new highs amid a 60%-plus run YTD.
There were concerns surrounding the company’s saturation of existing, large pharmaceutical clients and that their expansion into adjacent verticals would not be enough to sustain further growth. But Veeva’s life sciences industry focus has proved successful. Its cloud-based software is tailored toward the needs of life sciences companies who utilize their software and services to realize the benefits of a cloud-based architecture and mobile applications.
First-quarter results came in well above guidance, demonstrating the momentum and efficiency of Veeva’s operating model. Total revenues increased 32% year-over-year, while operating income grew 110%. Upselling Veeva Vault has been a success, with the number of customers with multiple Vault products up more than 70% YOY. Veeva OpenData has also made large gains, having reached the 100 customer milestone.
At this rate, Veeva should easily meet its fiscal year guidance of $665 to $669 million, with a strong likelihood of exceeding earnings expectations.
Cutting-Edge Healthcare Stocks to Buy: Cotiviti Holdings (COTV)
Cotiviti Holdings Inc (NYSE:COTV) provides analytics-driven payment accuracy solutions for healthcare and retails markets via their proprietary technology platform. The revenue split between healthcare and retail was 88% to 12%, respectively, for the last fiscal year.
Large healthcare companies are in desperate need of utilizing technology to provides insights and value. Cotiviti estimates that it saved its clients over $3.7 billion last year, so the value add in dollar terms is self-evident.
Through machine learning and computing, COTV is better able to grapple with increasingly complex contracts and increasing volume of such contracts with the tailwind of more healthcare spending. Cotiviti’s sweet spot is right in the middle of the claims process, which is where traditional healthcare companies don’t have the deep analytical tools to solve problems as they arise.
In July, COTV acquired RowdMap, which will strengthen their value proposition to existing and new clients. Where Cotiviti focuses on inaccurate claims and payments, RowdMap complements that area with helping clients reduce unnecessary/inefficiently delivered services. The result of the acquisition is a more well-rounded player with opportunities to cross-sell and expand adoption.
Cutting-Edge Healthcare Stocks to Buy: Hologic (HOLX)
Hologic, Inc. (NASDAQ:HOLX) stock has been beaten down — unfairly, I would venture to say — as management orchestrates a turnaround of this $10.7 billion medical device company with a strong franchise in women’s health.
After a troubling drop in sales growth from Q1 to Q2, the third quarter proved the naysayers wrong, with year-over-year growth of 12%. Granted, if you exclude the contributions from the Cynosure acquisition and divestment of the blood screening business, the growth is much more muted, in the mid-single-digit range.
Overall, however, the turnaround seems to be on track. And at current valuations, investors have a great opportunity to buy on the dip as the fundamental business isn’t as dire as the market suggests. Hologic has managed to stem the tide of declining NovaSure sales and accelerated core product sales in Molecular, Breast Imaging, and MyoSure. And there is still room to roll out the Genius Mammography product line and upgrade to 3D, representing an estimated $3 billion opportunity.
At these prices, HOLX stock is heavily discounted given the room to grow both in the U.S. and ex-U.S. The international opportunity is in its nascent stages, and it would be a mistake to think the newly revamped senior team won’t capitalize on the opportunity.
Cutting-Edge Healthcare Stocks to Buy: Accuray (ARAY)
Headquartered in Sunnyvale, California, Accuray Incorporated (NASDAQ:ARAY) is a radiation oncology company that develops, manufactures and sells treatment solutions primarily under the CyberKnife, TomoTherapy, Radixact and Onrad brands.
Radiation therapy is in high demand for cancer treatment, though in low-income countries, only 10% have access to such a treatment option. Surgery and chemotherapy are more expensive treatment options at 3x and 5x the price of radiation, respectively. Given this relative cost competition, radiation therapy developers like Accuray stand to benefit.
But of course, there are many other players in the space who are all focused on improving their technology and product portfolio. ARAY differentiates itself on the clinical side. For example, Radixact continuously undergoes studies to scientifically demonstrate treatment time reductions.
Innovation also comes from strategic partnerships that can add value to Accuray’s existing systems. The medPhoton partnership to develop advanced imaging capabilities for the CyberKnife System is a prime example. The company’s tactics to improve technology should result in ARAY meeting the high end of guidance for the year.
Cutting-Edge Healthcare Stocks to Buy: Intuitive Surgical (ISRG)
Intuitive Surgical is the standard bearer of minimally invasive, high-tech surgical systems. Their da Vinci line of advanced instruments and accessories improve vision, dexterity and precision of surgical procedures. The tangible benefits from technology are evidenced by the increases in procedures and new system placements worldwide.
ISRG has a compelling business model, with more than two-thirds of revenue considered recurring (71% in 2016). Additional accessories and the servicing of the complex systems drive that recurring segment. The benefits for clients are well-worth the upfront cost, which ranges from $500,000 to $2 million. They include “reduced length of stay, fewer conversions to open surgery, reduced complications, fewer readmissions, and lower infection rates.”
Approximately 750,000 da Vinci procedures were performed in 2016, up 15%. This data supports the increased acceptance of robotic surgery, and it potential in assisting in additional procedures like thoracic, colorectal and hernia repair. And with the daVinci X Surgical System clearing FDA and CE hurdles, ISRG has another big win for the year.
Cutting-Edge Healthcare Stocks to Buy: Boston Scientific (BSX)
Boston Scientific Corporation (NYSE:BSX) is like a new company after José Almeida started as its new CEO in January 2016. Almeida formerly sat as the head of Covidien. Under new leadership, Baxter’s operating margins are up to 13.6% (as of 2016 year-end) with guidance to reach 20% by 2020.
The transformational changes afoot mean a huge boost in current and future profitability. Costs are down, underperforming products have been cut, and R&D has been optimized. This means a portfolio of higher margins businesses that will enhance free cash flow. Part of this cash flow will be diverted to dividends (BSX increased the quarterly dividend by 23% in May). And with a leverage ratio of below zero (net debt to EBITDA) there are a lot of financing options at the company’s disposal.
Between improvements at the corporate level and at the product level, BSX looks extremely well-positioned amongst other large cap healthcare companies to deliver outsize returns to shareholders. Valuation too, looks very reasonable. Based on the low end of 2020 EPS guidance of $3.25, you’re getting BSX for a P/E of just above 8.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.