ASX healthcare shares have been strong performers over the years, driving a lot of the gains in the S&P/ASX 200 Index (ASX: XJO).
The broader ASX 200 index has climbed 20% over the last five years. But the S&P/ASX 200 Health Care Index (ASX: XHJ) has shot the lights out in comparison, pumping out an 88% gain.
Sticking with this healthcare theme, let's square up two of the biggest Aussie healthcare success stories: CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH).
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Compare the pair
Before I present a bull case for each of these ASX 200 healthcare stalwarts, here's a quick summary of how they stack up across some headline metrics.
| CSL | Cochlear | |
| Market capitalisation | $140 billion | $14 billion |
| FY22 revenue | US$10.1 billion (AU$14.9 billion) | AU$1.6 billion |
| FY22 revenue growth | 2% | 10% |
| FY22 underlying profit | US$2.3 billion (AU$3.4 billion) | AU$277 million |
| FY22 underlying profit growth | -5% | 18% |
| Price-to-earnings ratio | 41x | 49x |
| Trailing dividend yield | 1.1% | 1.4% |
The case to inject CSL shares into your portfolio
With roots in the Australian government and a history dating back to World War I, CSL now competes on the world stage as the fifth-largest global biotech company.
CSL generates the bulk of its earnings through its Behring division, which provides treatments for serious and rare diseases.
CSL's other business, Seqirus, is smaller but no less impressive, standing as the second-largest flu vaccine maker in the world.
A recent high-profile acquisition will also see Vifor Pharma enter the fold, diversifying CSL's footprint into the specialty pharmaceuticals business.
CSL offers an earnings profile that is both growing and defensive; a powerful combination.
Prior to COVID, the company consistently delivered top-line growth almost like clockwork as the plasma therapeutics market grew and more people around the world gained access to CSL's products.
What's more, the company ploughs around US$1 billion each year into research and development, bolstering CSL's market-leading position in innovation.
This R&D effort supports a healthy pipeline of new potential products that could drive further revenue growth in the future.
At the moment, CSL has nine late-stage R&D programs that it expects to complete between FY23 and FY26.
The highest-profile program is CSL112, a treatment to reduce the risk of recurrent cardiovascular events, such as heart attacks. It's CSL's largest program yet, with the phase 3 clinical trial enrolling more than 17,000 patients from roughly 1,000 medical centres around the world.
Why are CSL shares defensive?
Given the nature of CSL's life-saving and life-extending products, demand typically holds up throughout every stage of the economic cycle.
What's more, its plasma business can actually benefit from rising unemployment in the United States, where donors are paid.
On a per litre basis, the single-biggest cost for CSL Behring is donor fees to collect blood plasma. This plasma is a crucial component for manufacturing CSL's treatments.
When unemployment rates rise, more people will likely look for alternative sources of income. And donating plasma can earn regular donors upwards of US$200 a month.
With more people coming through the door to donate plasma, CSL's average cost per litre of plasma collected reduces due to the fixed costs of running a centre.
Plus, as donor eagerness rises, CSL doesn't have to compete as aggressively against other centres. In this way, the company doesn't need to rely as heavily on extra financial incentives and bonuses to attract donors.
Why Cochlear shares could be a sound investment
The bull case for Cochlear shares is supported by positive industry dynamics and the potential for a greater market presence.
The World Health Organisation estimates there are more than 60 million people worldwide who experience severe, profound, or complete hearing loss.
However, the market remains largely underpenetrated. Less than 5% of the people that could benefit from an implantable hearing solution have received one.
What's more, while Cochlear is a top dog in its field, its slice of the overall pie is muted.
The ASX 200 business has more than 60% market share of the global cochlear implant market. But this share dwindles to just 4% in the broader severe or higher hearing loss segment where hearing aids dominate.
Cochlear implants vs hearing aids
Hearing aids and cochlear implants are both options for people suffering from severe or higher hearing loss. But there are clear distinctions between the two. And cochlear implants can deliver superior outcomes, especially for those with profound or complete hearing loss.
Hearing aids are non-invasive and simply make sounds louder. In contrast, a cochlear implant bypasses damaged portions of the ear to deliver sound signals to the auditory nerve, which then directs the signals to the brain.
A cochlear implant has two parts: an internal receiver, which is implanted under the skin behind the ear; and an external sound processor, which is worn like a hearing aid.
The beauty here, for both recipients and shareholders alike, is that Cochlear continues to roll out new sound processors that are compatible with prior generation implants. In this way, recipients are able to upgrade to the latest technology, all the while Cochlear collects more revenue from its existing user base.
Cochlear has sold more than 700,000 implants to date, representing a vast recipient base to upsell.
The company typically launches a new product every four to five years. Its current flagship sound processor, Nucleus 7, was rolled out in 2017.
So, on cue, Cochlear has revealed it will launch the new Nucleus 8 processor towards the end of this year. The company remains hush on the details but this will propel revenue as recipients upgrade their devices.
Further supporting Cochlear shares are regulatory tailwinds as product indications broaden and funding reimbursement expands around the world.
Better ASX 200 healthcare buy
I believe there's a compelling investment case for both of these ASX 200 healthcare shares.
In particular, I like the industry tailwinds supporting each company's future growth runways. And I especially like their fortified, market-leading positions in their respective industries, where barriers to entry are also high.
But if I had to choose, I'd be leaning towards CSL shares.
With a long track record of delivering high returns on capital, industry-leading efficiency, a history of R&D success, and a more defensive earnings profile, I'd be happy to hold CSL shares as a long-term investment in my portfolio.
