Healthcare stocks in general and biopharma stocks in particular are known for their volatile ways. Having said that, the rare gem within this hectic sector can produce jaw-dropping gains quite literally overnight, making it an appealing area for ambitious investors on the hunt for market-crushing gains.
With this in mind, we asked three of our contributors which healthcare stocks might be attractive to aggressive investors. They recommended Sarepta Therapeutics (SRPT -2.67%), Diplomat Pharmacy (DPLO), and Teligent (TLGT). Read on to find out why.
This rare disease specialist may be ridiculously undervalued
George Budwell (Sarepta Therapeutics): The battleground stock Sarepta Therapeutics is shaping up to be either a ridiculous bargain based on the forward-looking sales of its Duchenne muscular dystrophy (DMD) drug Exondys 51, or an outright value trap based on this same drug's potential to be pulled off the market altogether.
Bullish investors and analysts alike believe that Exondys 51 could eventually post peak sales in excess of $1 billion. So given Sarepta's market cap of about $1.8 billion, this stock is arguably a steal in light of its potential to be acquired at perhaps 3 to 5 times Exondys 51's peak sales opportunity. And that's not even taking Sarepta's other DMD clinical candidates into account -- they may drive the drugmaker's total annual revenues past the $2 billion mark.
The bearish portion of the tale is that Exondys 51 achieved a conditional approval by a razor thin margin, and there's still no definitive proof that this drug works as advertised. In fact, some industry insiders are convinced that this drug will turn out to be another dead end in the battle against DMD, or at best play only a minor role as part of an as-yet-undefined combo therapy.
Personally, I think the truth is somewhere in between. I find it hard to believe that the FDA would pull the only drug approved for this particular DMD population -- that is, unless it totally flames out in late-stage testing. But these billion dollar sales estimates also seem unrealistic, given that Exondys 51 only covers 13% of the total DMD patient population. Regardless, this mid-cap drugmaker isn't for the faint of heart, arguably making it fodder for only the most aggressive of investors.
This trend could lead to big profits for investors
Sean Williams (Diplomat Pharmacy): Healthcare investors looking for ambitious investment opportunities, which in some cases can take years to bloom, would be wise to take a closer look at specialty pharmacy services company Diplomat Pharmacy.
Diplomat's recent string of quarterly reports has probably scared away a number of short-term investors who expected its torrid growth pace to continue. In the first quarter, the company wound up reporting $1.08 billion in sales, which represents 8% ($83 million) year-on-year growth, but it achieved this through a $116 million bump in acquisition revenue. In other words, organically, Diplomat went in reverse. The specialty pharmacy blamed headwinds in hepatitis C drugs and the loss of a few contracts for its organic underperformance.
However, there are a number of industry dynamics that make a specialty pharmacy like Diplomat appealing. For example, drug developers are pushing in greater numbers toward specialty medicines because of their pricing power. These include oncology, anti-inflammatory, and diabetes, to name a few. Even though Diplomat is dealing with hepatitis C growing pains, the gamut of specialty diseases and the sheer dollar amount being thrown at oncology research and development lead this Fool to believe that the niche specialty drug distribution business will be very strong over the long run.
Secondly, investors should realize that the Trump administration likely has no way to lower drug prices. Exceptionally long patent protection periods, a lack of a universal health plan, an unwillingness among insurers to fight back against high drug costs, and Republicans' preference for free-market drug pricing are all reasons why manufacturers and pharmacy service providers should possess strong pricing power for years to come.
Diplomat is also poised to benefit from bolt-on style acquisitions. For instance, Diplomat gobbled up TNH Advanced Specialty Pharmacy early in 2016 in order to expand its presence in oncology drug distribution in California and Texas. It also purchased BioRx, which focuses on ultra-rare, rare, and chronic diseases. Diplomat's healthy cash flow is allowing it to carve out a niche through both organic and inorganic channels.
With an expected long-term growth rate that could top 10%, Diplomat Pharmacy is a smart play for ambitious investors to consider for the long-term.
A backlog packed with growth potential
Brian Feroldi (Teligent): Generic drug manufacturers are poised to pay a starring role in helping to contain the soaring cost of drugs in the U.S. One company that is leading the charge is Teligent, a "specialty" generic drug manufacturer.
Most generic drug makers are focused on making copycats of popular small-molecule drugs. By contrast, Teligent focuses exclusively on selling generic drugs from the topical, injectable, complex, and ophthalmic markets (think creams, ointments, and lotions). The company's strategy is to create a generic copy of any drug that loses patent protection and then submit it for regulatory approval. Once it gets the green light, the company then sells it at the pharmacy for a discount, allowing it to steal market share.
Teligent's decision to focus on specialty generic drugs is working out beautifully. Teligent's revenue has been rapidly growing, and the company recently turned profitable. Better yet, the company currently boasts 33 products that are pending FDA approval, so the odds look favorable that its torrid growth rate will be able to continue for the foreseeable future.
And yet, despite boasting a winning business model and being poised for substantial growth, Teligent's stock can currently be purchased for around 22 times forward earnings. I'd argue that's a bargain price that ambitious investors should take advantage of.