The healthcare sector has underperformed this year, with the Health Care Select Sector SPDR (NYSEARCA:XLV) down 1%. After a disappointing year-to-date performance, it’s time to consider some top healthcare stock picks. Notably, the sector has several secular tailwinds, like an aging global demographic that will accelerate healthcare spending.
Healthcare is a sector that invests heavily in research and produces lots of innovation. After all, the world needs drugs and medical equipment for the various medical challenges that ail us. That’s why leading healthcare companies are a must-own for any diversified portfolio.
While large pharmaceuticals enjoyed success in previous decades, they have several headwinds. They face upcoming patent cliffs and pressures from Medicare drug price negotiations in the U.S.
Therefore, for must-own healthcare stocks, it’s better to look elsewhere. Medical equipment is one area with a lot of growth potential. These three companies have innovative solutions and expanding total addressable markets.
Shockwave Medical (SWAV)
Despite Shockwave Medical’s (NASDAQ:SWAV) decline since May 11, it’s one of my top healthcare stock picks. After the stock rallied in April on speculation about a possible Boston Scientific (NYSE:BSX) acquisition, it has come crashing down back to earth.
In July, the Centers for Medicare & Medicaid Services decided not to increase the Medicare reimbursement rate for Shockwave products. The negative news led to a stock selloff.
Despite the setback, Shockwave is in a prime position for growth. It offers intravascular lithotripsy (IVL) technology to treat calcified cardiovascular disease. Its devices help address hardened calcified plaque in arteries for patients with various heart conditions. Its technology helps to alleviate symptoms and sometimes avoid invasive interventions.
These products improve cardiovascular patient outcomes, and the company is increasing its product range and expanding globally. Furthermore, its IVL solution faces limited competition with Abbott Laboratories (NYSE:ABT) products, not expected until 2026.
That is why SWAV stock is a must-own healthcare stock. The adoption of IVL technology is driving growth, and the 49% year-over-year (YoY) revenue growth in the second quarter highlighted the robust demand. The fiscal year 2023 guidance forecasting 48% to 49% growth was equally impressive.
Besides, the recent Neovasc acquisition enables Shockwave to expand into the refractory angina market. Currently, the Neovasc Reducer System is in trials for patients with coronary obstructive refractory angina.
Lastly, in addition to the solid growth, Shockwave is highly profitable, achieving 86% gross margins in the second quarter. Despite heavy investments in its sales force expansion and growth opportunities, net income was also positive.
TransMedics Group (TMDX)
TransMedics Group (NASDAQ:TMDX) provides organ preservation technology and is a leader in normothermic machine perfusion. Its FDA-approved Organ Care System replicates the body’s physiologic conditions, increasing utilization of donor organs and improving post-transplant outcomes.
Before the FDA approval of the OCS system, static cold storage was the standard method used in organ transportation. However, this approach exposed the organs to ischemia, a time-dependent injury due to the absence of oxygenated blood.
The OCS system reduces ischemia and increases the time an organ can be outside the human body before transplant. Furthermore, it supports various diagnostic tests to assess the organ’s viability. As a result, the system is improving donor overall donor utilization rates and the use of marginal organs.
Already, major transplant centers are adopting the OCS system. Plus, the system is gaining share from the standard cold storage systems. As a result, revenues are surging, with the company reporting revenue of $52.47 million in the second quarter of FY2023, representing 155% YoY growth.
Notably, TransMedics achieved this solid growth pace within three years of the first OCS Heart system approval in April 2021. For the year, management expects 93% to 103% growth based on the revenue guidance range of $180 million to $190 million. These stellar numbers qualify TMDX stock for the top healthcare stock picks list.
TransMedics OCS has a lot of growth runway. After launching the National OCS Program (NOP), it has removed significant barriers to adoption. Hospitals don’t need to worry about capital expenditure and training costs. In Q2 FY2023, U.S. revenues from NOP customers accounted for 95% of total revenue. As the NOP network scales, it will fuel growth over the coming decade.
Based on fundamental performance, Insulet (NASDAQ:PODD) is one of the top healthcare stock picks to own. It features in the Goldman Sachs Rule of 10 stock screen, having grown sales and net income by over 10% in the past two years, and is expected to continue the trend in the next three years.
Insulet has enjoyed tremendous growth due to its participation in one of healthcare’s hottest areas — the diabetes market. The company sells insulin delivery systems to diabetes patients.
Since May, PODD stock has come under immense pressure from speculation about the impact of GLP-1 drugs. The company sees the rise of weight loss drugs such as Wegovy and Mounjaro, produced by Novo Nordisk (NYSE:NVO) and Eli Lilly (NYSE:LLY), respectively, as a threat.
However, Citi recently came to the defense of the stock, upgrading it to a Buy. The analyst stated the selloff due to GLP-1 concerns was overdone. Although they lowered the price target slightly, the new target of $265 represents over 25% upside as of this writing.
The latest quarterly results support the analyst’s call. In the second quarter, Insulet’s Omnipod revenues increased 33% YoY to $380.5 million. What’s more, The U.S. grew faster than international, recording a 40.9% increase.
And the company is implementing strategic initiatives to deliver growth over several years. For instance, it launched the Omnipod 5 in the second quarter in the U.K. In the medium term, more growth lies ahead as Omnipod 5 continues to disrupt the diabetes market.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.