There’s plenty of uncertainty for the health-care industry and its investors.
Half of U.S. states are now reporting rising coronavirus infections. And Joe Biden is beating President Trump in election polls, with the potential for Democrats taking both chambers of Congress.
But even if the Democrats once again transform the U.S. health-care system, companies that develop new treatments and improved medical technology will continue to be rewarded.
Ashtyn Evans, a senior health-care analyst at Edward Jones, named six players she expects to perform well over the next three to five years. With that longer-term focus, Edward Jones doesn’t set price targets for buy-rated stocks.
“A Democratic sweep can be a big risk for health care. But if you think about where we can position for the long term, the companies that focus on innovation and not just on cost-cutting and M&A [mergers and acquisitions], are where we would point investors to,” she said in an interview.
Evans said Biden “is not advocating a single-payer system,” meaning fully socialized medicine, which would be “the biggest risk to the system.”
A Biden victory probably pushes that threat back at least four years. But there may be “other pressures on the edge of big pharma, including pricing pressure,” she said.
Ashtyn Evans, a senior analyst at Edward Jones.
She recommends investors focus on innovation in medical products and services, as well as companies with geographically diverse businesses.
Here are the six stocks Evans named as “buys,” followed by her comments about each company.
|Company||Ticker||Share of sales in U.S.||Share of sales outside U.S.||Est. sales growth – next fiscal year||Est. sales growth – fiscal year +2|
|Eli Lilly and Co.||LLY, -1.45%||57.0%||43.0%||7.7%||4.7%|
|Merck & Co.||MRK, -1.62%||43.6%||56.4%||7.3%||5.1%|
|Novartis AG ADR||NVS, -1.83%||34.2%||65.8%||5.8%||4.3%|
|Medtronic PLC||MDT, -4.80%||51.6%||48.4%||13.6%||8.3%|
|Abbott Laboratories||ABT, -4.38%||35.7%||64.3%||12.2%||8.1%|
|Thermo Fisher Scientific Inc.||TMO, -2.48%||48.4%||51.6%||8.3%||6.1%|
|Data source: FactSet|
The table includes percentages of sales for the most recently completed full fiscal years within and outside the U.S. and estimated total sales growth figures for the next two fiscal years, based on consensus estimates among analysts polled by FactSet. Scroll the table to see all the data.
Shares of Eli Lilly & Co. LLY, -1.45% have returned 22% this year through June 23. (All total returns in this article include reinvested dividends.) The dividend yield on the shares is 1.86%.
Evans expects the company’s earnings to increase at an annualized rate of 15% over the next five years, on the strength of its drug pipeline. “They have gotten smaller over time by spinning off non-pharma, non-innovative businesses,” she said.
On June 16, Elli Lilly announced that a Phase 3 study showed its Verzenio medication had “significantly reduced” the risk of recurrence of certain early-stage breast cancers.
Evans expects 60% of the company’s sales in 2022 to come from newly launched medications, as it continues to be a leader in diabetes treatment.
Merck & Co.’s MRK, -1.62% shares are down 14% this year and have a dividend yield of 3.16%.
During 2019, sales of Merck’s Keytruda immuno-oncology medication totaled $11.08 billion, or 24% of Merck’s total sales. Immuno-oncology drugs use the body’s immune system to fight cancer. Sales of Keytruda increased 55% last year. “This could be a $20 billion annual product by the mid-2020s,” Evans said.
Novartis AG NVS, -1.83% is headquartered in Basel, Switzerland. The company’s American depositary receipts are down 2% this year and have a dividend yield of 2.22%.
The company has a widely diversified portfolio of medications, according to Evans, “with a lot of innovation in cancer development as well, in different areas from Merck: Gene therapy to transfer genetic material into a patient for a cure.”
She describes these as “high-price, highly innovative, patient-specific treatments.”
Medtronic PLC MDT, -4.80% is based in Dublin, but its shares are listed on the New York Stock Exchange. The stock is down 17% this year and has a dividend yield of 2.48%
Evans called Medtronic “one of the most diversified” medical-technology companies, including cardiac devices, diabetes pumps, pacemakers and robotic surgery equipment. She likes its geographical diversification and its tax advantage from being domiciled in Ireland.
Shares of Abbott Laboratories ABT, -4.38% are up 6% this year and have a dividend yield of 1.58%.
Abbott manufactures generic drugs, diagnostic systems, nutritional products and medical devices. Evans sees a strong growth path for the company because of its exposure to emerging markets with increasing access to health care. She also sees a short-term benefit from the company’s coronavirus testing systems.
Thermo Fischer Scientific
Thermo Fischer Scientific Inc. TMO, -2.48% is up 10% in 2020. The company pays a small dividend for a yield of 0.25%.
The company provides equipment and systems used for pharmacological research. “They benefit from increased funding in the biotech space to develop new drugs,” Evans said.