If you're looking beaten-up stocks to scoop up at a discount, the healthcare sector has more than its fair share. While clinical-stage biotechs without products to sell have had it toughest over the past year, the pain hasn't been limited to any single sub-industry. There's a little something for everyone out there.
Here are three very different companies that have all watched their prices decline recently. Let's look a little closer to see if any are worth dusting off and placing in your portfolio.
1. McKesson Corporation: Growing pains
McKesson Corporation (MCK 3.19%) isn't satisfied simply by being the largest pharmaceutical distributor by revenue -- it's still pursuing an aggressive growth strategy. Luckily for healthcare bargain hunters, expenses associated with optimizing recent acquisitions have been weighing on the company's reported earnings and its stock price.
In May, for example, the company recognized a loss of $113 million when it shaved off a Brazilian distributor it picked up as part of a much a larger deal in 2014. The non-cash charge was largely responsible for net income falling 4.9%, despite a 4.4% increase in operating profit during the three months ended June, as compared with the same period last year.
In the low-margin drug-distribution game, size and scale are crucial to generating profits. With $193.1 billion in trailing revenue, McKesson is like Lebron James in Smurf Village. Over the past five years, a 90.7% increase in operating profit with just 64.6% more revenue is a testament to the industry axiom.
Since its latest quarterly report near the end of July, McKesson stock has given up more than 15% and is trading at under 9 times trailing free-cash-flow. The quarters ahead might be choppy, but from a long-term perspective this stock looks like a bargain.
2. Celldex Therapeutics: Underappreciated pipeline
Beaten-up biotech Celldex Therapeutics (CLDX 4.16%) doesn't have big cash flows, but it does have a clinical-stage pipeline bubbling with activity. Its lead candidate, Glemba, already showed a significant benefit in a well-defined group of breast cancer patients who have run out of treatment options. It's currently enrolling a larger group of similar patients into a trial that could lead to an approval, if the results fall in line with the previously observed benefit.
Celldex Therapeutics' stock took a big hit earlier this year when its former lead candidate, entirely unrelated to Glemba, failed its first test against the standard of care in a notoriously difficult-to-treat form of brain cancer. Despite jettisoning the failed program, it doesn't take much for this incredibly busy biotech to spook the market.
With a market cap around $400 million, Celldex looks like a compelling bargain, given Glemba's potential in breast cancer alone. But it's not a one-trick pony. In fact, it has a deep bench that could provide a safety net if the company suffers another surprise clinical setback.
3. Valeant Pharmaceuticals International, Inc.: Bargain or value trap?
Among all the beaten-up healthcare stocks, perhaps none have been as deserving of the thrashing as Valeant Pharmaceuticals International, Inc. (BHC -0.69%). Revelations of incorrectly recorded revenue, financial statement filing delays, and an abrupt CEO change only scratch the surface of issues that led to this stock's 90% decline since last summer.
A peak under the surface reveals $30.77 billion in long-term debt at the end of June. Interest expense associated with that debt exceeds operating income, largely due to increased non-cash charges. In a nutshell, increased scrutiny of Valeant's drug pricing practices has hammered the perceived value of its product portfolio.
Luckily, Valeant Pharmaceuticals is still generating plenty of free cash flow, and sales of existing assets could lower its debt burden to manageable levels. Steps to rebuild soured relationships have been less than encouraging so far, but a recovery isn't entirely outside the realm of possibility. A recent approval for opioid-induced constipation treatment, Relistor, and an FDA decision concerning brodalumab for psoriasis expected next month could help.
Shares of Valeant are trading at an ultra-low 4.2 times free cash flow, which would lead to some impressive gains if it emerges from the sinkhole it created. Strong cash flows and new products are a start, but it might be best to leave this stock at the bottom of the bargain bin until its future is less clouded.