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5 Top Healthcare Stocks to Buy in 2019

Keith Speights, The Motley Fool

We're nearing the end of another decade. It had been a decade in which stocks have generally performed very well. And one sector has outperformed the S&P 500 index in total return every year but one this decade. Which sector is it? If you guessed healthcare, pat yourself on the back.

There's no guarantee that healthcare stocks will continue to beat the S&P 500 in 2019. But people will still need medicine and healthcare services, no matter what the state of the economy is. Global populations are aging, too. Overall, the prospects for the healthcare sector remain strong, and several top healthcare stocks appear to be especially great picks for investors in 2019.

Physician holding a table in one hand and the other hand extended with an image of 2019 appearing over her hand surrounded by points of light connected by lines

Image source: Getty Images.

What is the healthcare sector?

Healthcare is huge. According to the federal Centers for Medicare and Medicaid Services (CMS), spending on healthcare accounts for roughly 18% of U.S. gross domestic product -- the total value of everything produced in the country. And that percentage continues to grow.

Healthcare is also broad in scope. The sector consists of multiple industries that generate billions of dollars in revenue each year, including drugmakers, health insurers, hospitals, long-term care, medical device companies, pharmacies, and more.

All of these industries within the healthcare sector should grow for a long time to come due to one key factor: aging demographics. The U.S. Census Bureau projects that the number of Americans 65 or older, for example, will nearly double by 2060. By 2035, older Americans will outnumber children for the first time in U.S. history.

These demographic trends aren't limited to the U.S. Europe's population is aging. The same is true for major Asian countries, particularly China.

The increase in the number of older individuals across the world will drive higher demand for healthcare products and services. Unfortunately, this demand is also likely to put an enormous strain on the ability of governments and private organizations to pay for the resulting higher healthcare costs.

What are healthcare stocks?

Healthcare stocks are publicly traded companies across an array of different health-related businesses. As you learn more about the healthcare industry, you will find which kinds of healthcare stocks you are most drawn to.

Pharmaceutical companies develop and sell products including drugs, medical devices, and even robotic surgical systems. Hospital stocks operate medical centers. There are biotech companies that develop biologic drugs using technology. There are genomic companies, telemedicine companies, marijuana stocks, health insurers, retail pharmacies. specialty pharmacies, and many more.

What to look for in healthcare stocks

Healthcare is a hot area for investors hoping to profit from the trends toward more spending on healthcare and an aging population. But what should investors specifically look for in healthcare stocks?

Perhaps the best strategy is one that's been around for a long time: Identify stocks that provide solutions that are better, faster, or cheaper than the competition. This approach is especially applicable to healthcare because of the expectations of significant growth in costs over the coming decades.

Healthcare providers and patients will look for drugs and medical devices that deliver better outcomes than previous options. They will seek innovative solutions that speed up the treatment and recovery time for diseases and medical procedures. And all players in the healthcare sector will eagerly desire products and services that help control rapidly rising costs.

It's also important that investors look for healthcare stocks that have sustainable competitive advantages. A company that launches a product or service that's better, faster, or cheaper than the competition for only a short period of time won't generate the same level of gains as a company with an enduring moat -- a competitive advantage over rivals that protects profits and market share over the long run.

Top healthcare stocks for 2019

Several top healthcare stocks appear to be well positioned to deliver solid gains in 2019. The underlying businesses of these stocks enjoy strong long-term competitive advantages that should make them winners for investors.

Here are the top healthcare stocks for 2019:

Company

Market Cap

Business

Celgene (NASDAQ: CELG) $60.4 billion Hematology, immunology, and oncology drugs
Illumina (NASDAQ: ILMN) $46 billion Gene sequencing
Intuitive Surgical (NASDAQ: ISRG) $62 billion Robotic surgical systems
Teladoc Health (NYSE: TDOC) $4.4 billion Telehealth
Vertex Pharmaceuticals (NASDAQ: VRTX) $49.8 billion Cystic fibrosis drugs

Data sources: Yahoo! Finance, company presentations. Market caps as of Jan. 21, 2019.

1. Celgene

There aren't many biotech stocks that are almost guaranteed to deliver a double-digit percentage return in 2019. But Celgene probably will. That's because Bristol-Myers Squibb (NYSE: BMY) hopes to buy Celgene in a transaction that values the biotech at $102.43 per share -- well above Celgene's current share price.

It's not a done deal just yet. Shareholders of both Bristol-Myers Squibb (BMS) and Celgene must approve the acquisition. Regulators will also have their say. But it seems likely that Celgene will become part of BMS before September 2019.

Even if the deal with BMS somehow falls through, the biotech checks off the boxes in what you should want in a healthcare stock. Celgene is a leader in developing innovative therapies targeting the treatment of blood disorders, cancer, and immunological conditions.

Celgene's blockbuster drugs Revlimid and Pomalyst are two of the most effective treatments for multiple myeloma, a blood cancer that will cause nearly 13,000 deaths in the U.S. this year. In addition, Revlimid is approved for treating two other rare blood diseases, myelodysplastic syndromes (MDS) and mantle cell lymphoma (MCL).

The biotech also ranks as a key competitor in the inflammation and immunology market with Otezla. Sales continue to soar for the drug, which has won approvals from the Food and Drug Administration for treating psoriasis and psoriatic arthritis.

Celgene has another winner in treating solid tumors with Abraxane. The drug is currently approved as a treatment for advanced breast cancer, non-small-cell lung cancer, and advanced pancreatic cancer.

The company's pipeline is also loaded with potential winners. The biotech announced at January's J.P. Morgan Healthcare Conference that it had completed the submission of fedratinib for FDA approval as a treatment for myelofibrosis. Celgene anticipates filing for approval of ozanimod in treating multiple sclerosis in the first quarter of 2019.

In addition, Celgene's pipeline includes three promising blood disease drugs. Liso-cel is a cell therapy where the body's immune cells are engineered to target specific types of cancer. Celgene hopes to bolster its multiple myeloma franchise with another cell therapy, bb2121, which is being developed with partner bluebird bio . Luspatercept, a drug licensed by Celgene from Acceleron Pharma , is being evaluated in clinical studies as a possible treatment for MDS, beta-thalassemia, and myelofibrosis anemia.

2. Illumina

One of the biggest-ever advances in healthcare has been unlocking the secrets of the human genome -- the complete set of genes for humans, made up of DNA. Illumina is one of the most important companies that have enabled progress in this genetic research; its technology played a crucial role in slashing the cost of mapping a human genome from around $100 million in 2002 to $1,000 today.

More than 90% of all gene sequencing that has been performed was done using Illumina's systems.

Illumina is a great healthcare stock to buy now because despite the company providing lower-than-expected revenue guidance for 2019 , its recent track record has been to underpromise and overdeliver. Its powerful NovaSeq gene-sequencing system began shipping in 2017, and still has a long runway for growth. What's more important is that Illumina should benefit tremendously from several high-growth markets that are still in their infancy.

More payers are covering noninvasive prenatal testing (NIPT) than ever before. Illumina plans to launch a new version of its VeriSeq NIPT system in the first half of 2019. This system provides the fastest processing on the market and roughly doubles the number of abnormalities that can be detected compared with the first VeriSeq version.

The use of gene sequencing in cancer research and screening is rapidly gaining momentum. Illumina introduced its TruSight Oncology 500 molecular test for lung cancer in October 2018. The company is also developing a version of TruSight for use in blood tests that can detect multiple types of cancer at very early stages.

Population genomics -- large-scale comparisons of genes within specific populations -- is another significant growth driver for Illumina. Major population-genomics efforts are underway in the U.S., England, France, Singapore, and in other countries using Illumina systems.

Consumer genomics also present a promising growth opportunity for Illumina. The company's customers include top consumer genomics providers like Ancestry; 23andMe; and Illumina's own spinoff, Helix. Thus far, the consumer genomics market has been primarily in the U.S., with a focus on genealogical research. But the market is expanding across the world and now includes other areas like health and nutrition.

3. Intuitive Surgical

Intuitive Surgical believes its robotic surgical systems deliver better outcomes from surgical procedures and lower the overall cost to the healthcare system. The company launched its first da Vinci robotic surgical system in 1999. Last year, more than 1 million surgical procedures were performed using the da Vinci system.

The improved outcomes from using the system stem from the variability in performance among surgeons. Intuitive Surgical CEO Greg Guthart said at the J.P. Morgan Healthcare Conference that complications are three times more likely from the lowest quartile of surgeons based on surgical skill than from the highest quartile of surgeons. One way Intuitive improves the capabilities of surgeons is to allow them to practice using da Vinci in a simulated environment. The da Vinci system also provides more-precise control for surgical instruments and greater visibility of surgical areas than conventional surgery does during actual procedures.

Although Intuitive Surgical's systems are expensive, the company maintains that total healthcare costs can be lowered by using robotic surgery. The minimally invasive surgical approach used by a da Vinci can reduce hospitalization times by half. It can lower the risks of postoperative complications and hospital readmissions. Overall, hospitalization costs can be reduced by roughly one-third using Intuitive's robotic surgical system.

Like Illumina, Intuitive Surgical has learned the benefits of managing investors' expectations . Over the last three years, the company has consistently projected lower growth in procedure volume than it actually delivered. That trend makes this year especially promising since Intuitive forecast the highest procedure growth in years for 2019.

This procedure growth is the primary factor behind Intuitive's impressive overall revenue growth. The company makes more than 70% of its total revenue from recurring sources, especially instrument replacements, which are driven by the number of procedures performed. That's money the company can count on.

4. Teladoc Health

Teladoc Health delivers on the better, faster, and cheaper value propositions that any investor wants to see in a healthcare stock. Though "best" is a more apt word than "better" when describing Teladoc's status in the telehealth market. There are plenty of other companies that provide virtual healthcare services. But none offers the global reach Teladoc Health has. And none of them offers the comprehensive suite of services boasted by Teladoc.

For the patients who use Teladoc, faster service is a big plus. Most physician visits involve traveling to the doctor's office; waiting for long periods; finally seeing the doctor; then heading back to home, work, or the pharmacy to pick up your medicine. With Teladoc, patients can talk with a qualified healthcare professional from anywhere at any time without the travel.

In addition to the convenience offered to patients, Teladoc provides cost savings to the employers and insurers that it serves. The company points to multiple examples where it has saved millions of dollars for its customers.

It's not surprising that Teladoc has generated phenomenal growth. Customers include 40% of the Fortune 500 and more than 35 major health plans. Revenue has increased by a compound annual growth rate of 75% over the last five years.

Can Teladoc keep the growth going? Yep. It continues to target corporate customers, but it's also going after big opportunities in the direct-to-consumer market, Medicare, and Managed Medicaid.

At the same time, Teladoc plans to keep expanding into new international markets. It also intends to offer more telehealth services. The company's partnership with CVS Health (NYSE: CVS) is expanding, too. The pharmacy chain selected Teladoc as its telehealth partner for MinuteClinic outpatient clinics. The pharmacy giant hopes to extend the telehealth program to clinics in all 50 states and provide more solutions for patients with complex conditions.

5. Vertex Pharmaceuticals

Vertex Pharmaceuticals basically enjoys a monopoly right now in providing treatments for the underlying cause of cystic fibrosis (CF). The biotech has three approved drugs -- Kalydeco, Orkambi, and Symdeko -- that together hold the potential to treat nearly half of the estimated 75,000 CF patients across the world.

Securing additional regulatory approvals to treat younger CF sufferers should help Vertex boost the number of patients that its products can treat by 7,000 to around 44,000. But the next big advancement in CF will be with the biotech's triple-drug therapies.

Vertex has three different triple-drug combinations in clinical trials. CEO Jeff Leiden said in January that the company will select the best of these treatments and file for FDA approval by the middle of 2019. Vertex expects that its triple-drug therapies could increase the addressable patient population to 68,000, roughly 90% of the total number of CF patients.

That leaves another 10% of CF patients without effective treatments. Vertex is working with CRISPR Therapeutics (NASDAQ: CRSP) on researching the use of gene editing -- a method of editing a DNA sequence by deleting or replacing genes -- to treat the remaining CF patients whom its current drugs and triple-drug combos can't help. Vertex has also teamed up with CRISPR to move beyond treating CF. The two biotechs recently began early-stage clinical studies evaluating gene editing therapies to treat rare blood disorders beta-thalassemia and sickle cell disease.

Risks for these healthcare stocks

Four of these healthcare stocks face regulatory risks. Celgene and Vertex could fail to win regulatory approval for new drugs. Illumina and Intuitive Surgical, likewise, could fail to secure regulatory clearance for new medical devices. All of the stocks, though, face other kinds of risks.

It's possible that payers, especially the U.S. government, could clamp down on the high prices paid for healthcare products and services. This is especially an issue for drugmakers like Celgene and Vertex but could also potentially impact Illumina, Intuitive Surgical, and Teladoc Health.

Perhaps the greatest risk affecting all five stocks, though, is the threat of competition. Celgene faces competition from a generic version of Revlimid in limited volumes beginning in 2022. This threat is especially concerning to some investors because Revlimid currently generates more than 60% of Celgene's total revenue. While Illumina has dominated gene sequencing for years, the company has serious competition. The rival that could potentially present the most disruptive threat is privately-held Oxford Nanopore, which uses a process called nanopore sequencing that could enable very small systems to sequence genes at much-lower costs. Intuitive Surgical will see more competition as giant medical device maker Medtronic rolls out its robotic surgical system. Down the road, other companies could also compete directly against da Vinci.

Telehealth remains a very fragmented market, as Teladoc Health competes against many smaller companies. Consolidation of these smaller competitors or the entrance of a well-funded larger company into the industry could threaten Teladoc's market dominance.

It's also possible that AbbVie could give Vertex a run for its money in CF in the future. AbbVie and partner Galapagos NV restructured their CF alliance in October 2018 in a deal where AbbVie took over all CF development. Like Vertex, AbbVie is working on a triple-drug combo treatment for CF.

These risks are real, therefore conservative investors might prefer to invest in other stocks. However, there are some reasons investors shouldn't be too concerned about the risks.

For example, Celgene's pipeline candidates should enable it to generate strong revenue growth despite the coming challenges for Revlimid. And assuming the Bristol-Myers Squibb acquisition is finalized, the combined companies will have several blockbuster products, especially cancer drug Opdivo, to help offset future sales declines for Revlimid.

Illumina's high accuracy levels make its technology the gold standard for gene sequencing. Its install base, investments in new innovations, and financial flexibility to buy up-and-coming smaller rivals should keep it at the top for a long time to come.

Intuitive Surgical should remain the leader in robotic surgical systems and continue to enjoy strong growth. The company's large customer base gives it a tremendous advantage because customers have financial motivation to maximize the return on their investment in the da Vinci system. Intuitive has a long track record that new entrants will find challenging to compete against. The company also continues to introduce innovations that attract new customers while retaining existing ones.

AbbVie might challenge Vertex. But Galapagos reported disappointing results in June 2018 from a clinical study of one of its key drugs that were candidates to be included in a triple-drug combo. Vertex enjoys a big head start and shouldn't have anything to worry about for a while.

As for Teladoc Health, the company's size and its scope of services give it a significant competitive advantage over current rivals . A larger company seeking to enter the telehealth market might find Teladoc a more attractive acquisition target than smaller telehealth companies.

Great opportunities

The healthcare sector presents great opportunities for long-term investors. These five stocks also look like great opportunities as well. Each is positioned to benefit from trends fueling growth in the healthcare sector. Each is a leader in their respective areas of focus and their businesses.

Celgene, Illumina, Intuitive Surgical, Teladoc Health, and Vertex Pharmaceuticals offer products and services that are better, faster, and/or cheaper than the alternatives. That should make these stocks winners in 2019 and beyond.

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Keith Speights owns shares of Celgene, Illumina, Intuitive Surgical, Teladoc Health, and Vertex Pharmaceuticals. The Motley Fool owns shares of and recommends Celgene, Illumina, Intuitive Surgical, and Teladoc Health. The Motley Fool owns shares of CRISPR Therapeutics. The Motley Fool recommends CVS Health and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy .