We recently published a list of 8 Most Promising Healthcare Stocks According to Hedge Funds. In this article, we are going to take a look at where Merck & Co., Inc. (NYSE:MRK) stands against other most promising healthcare stocks according to hedge funds.
The Healthcare Sector: Growth, Innovation, and the Impact of AI
The healthcare sector depends on medical technology advancements, particularly devices used in disease prevention, diagnosis, and treatment. Unlike pharmaceuticals, medical devices work through physical or mechanical means rather than chemical processes. Key products include pacemakers, imaging equipment, dialysis machines, and implants.
In the US, the healthcare sector is flourishing. According to a recent estimate, the country’s healthcare spending increased by 7.5% in 2023, above the nominal GDP growth rate for the same year. A record 93.1% of Americans now have health insurance, which helped fuel last year’s sharp increase in healthcare spending. The country’s national healthcare spending is expected to increase at an average rate of 5.6% between 2023 and 2032, above the 4.3% growth predicted for GDP.
Additionally, the industry is growing quickly on a global scale. According to recent McKinsey projections, healthcare profits would increase at a compound annual growth rate (CAGR) of 7% from $583 billion in 2022 to over $800 billion by 2027. Although labor shortages and rising inflation rates continued to pressure the business in 2023, a good risk-reward climate in the sector is expected to make 2024 a year of recovery. According to the American investment firm, the events of 2023 have produced an alluring opportunity for investors to engage in the healthcare industry.
According to research published this month by Silicon Valley Bank, investments in artificial intelligence (AI) in the healthcare sector have also increased dramatically in recent years, expanding at a rate twice as fast as the IT sector. According to the report, businesses using AI account for one out of every four dollars spent in the healthcare industry. The Silicon Valley Bank anticipates that over $11 billion will be spent in the AI healthcare industry this year, with an estimated $2.8 billion already invested in 2024.
Investor confidence in the healthcare industry is still high, according to Deloitte’s 2024 Global Health Care Sector Outlook. The industry received $31.5 billion in private equity funding between 2019 and 2022. Over the next five years, the United States healthcare sector might save almost $360 billion thanks to the numerous businesses integrating artificial intelligence into their operations. Shortly, AI is probably going to have a big impact on medical administration, diagnosis, treatment, and patient care. Predictive analytics and health record automation are expected to further improve the effectiveness of healthcare providers and their offerings.
In recent months, growing economic uncertainty has prompted a shift toward more defensive stocks, with healthcare emerging as a key beneficiary. The broader market’s healthcare sector has surged by over 3.6% and in the past year, it has returned over 11%. In view of this, we will take a look at some of the most promising stocks from the healthcare sector.
Our Methodology
For our methodology, we picked the most weighted stocks from the iShares Global Healthcare ETF and then ranked them based on their total number of hedge fund holders as of Q3 2024, as tracked by the Insider Monkey database.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of a person’s hand holding a bottle of pharmaceuticals.
Merck & Co., Inc. (NYSE:MRK)
Number of Hedge Fund Holders: 86
Merck & Co., Inc. (NYSE:MRK), known as MSD outside of North America, is a global pharmaceutical giant that develops, manufactures, and markets prescription medicines, vaccines, and animal health products. The company’s primary focus is on creating innovative solutions for some of the world’s most challenging health issues, including cancer, infectious diseases, and cardiovascular disorders.
The company’s cancer medication Keytruda, which rose to the top of the global medicine sales charts, is the main focus of its long-term prospects. The pharmaceutical company’s second-quarter revenue of $16.1 billion represented a 7% rise over the prior year. Keytruda’s $7.3 billion in sales represented a 16% rise over the same time last year.
Although a significant amount of Merck & Co., Inc.’s (NYSE:MRK) revenue comes from Keytruda, the firm has been attempting to expand its pipeline and reduce its need for the enormously popular blockbuster drug. To compensate for the lost revenue, new drugs like WINREVAIR, which treats pulmonary arterial hypertension, will be essential.
By 2029, analysts estimate that the company’s sales will have surpassed $6 billion and peaked at a significantly higher $11 billion. Although Winrevair and other resources may mitigate the impact on Merck & Co., Inc. (NYSE:MRK) and perhaps ensure a rise in sales, these numbers are not similar to those of Keytruda. A more modest growth stimulus is the pneumococcal vaccination Capvaxive, which regulators approved earlier this year. Sales could reach over $1 billion by 2027.
To co-develop three of its antibody-drug conjugates, Merck & Co., Inc. (NYSE:MRK) agreed to pay Japanese company Daiichi Sankyo $5.5 billion last year, increasing its investment in cancer treatments. Consequently, the company should be able to expand its operations even after the patents for Keytruda expire, given the abundance of opportunities available and the potential for even more in the future. As of Q3 2024, 86 hedge funds in Insider Monkey’s database held stakes in Merck & Co., Inc. (NYSE:MRK), with Fisher Asset Management being the largest stakeholder with stakes worth over $1.6 billion.
Regarding Merck & Co., Inc. (NYSE:MRK), Carillon Tower Advisers’ Carillon Eagle Growth & Income Fund made the following statement in its investor letter for the first quarter of 2024:
“After posting lackluster returns in 2023, Merck & Co., Inc. (NYSE:MRK) got off to a strong start in January by raising the long-term sales forecasts for its oncology and cardiology pipelines and reporting solid fourth-quarter results, coupled with strong financial guidance for 2024. Merck shares also finished the quarter strong after receiving U.S. Food and Drug Administration approval in late March for a new cardiology medicine with the potential to contribute significantly to sales growth over the next several years.”
Overall, MRK ranks 3rd on our list of most promising healthcare stocks according to hedge funds. While we acknowledge the potential of healthcare companies, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than MRK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.