While we Fools generally prefer to invest in companies that have battle-tested business models, we do recognize that it can be a smart idea to swing for the fences every now and then.
So, which stocks could have enough upside potential to justify the risk? We posed that question to our team of healthcare investors, and they picked Geron Corp. (GERN -1.07%), Insys Therapeutics (INSY), and ViewRay (VRAY).
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Go big or go home
George Budwell (Geron Corp.): If you're comfortable with risk and on the hunt for a stock with sky-high growth potential, the small-cap biotech Geron should definitely be on your radar right now. The underlying reason is that Geron and partner Johnson & Johnson (JNJ 1.49%) are developing a first-in-class telomerase inhibitor called imetelstat for the rare blood disorders myelodysplastic syndromes (MDS) and myelofibrosis (MF). If successful across both indications, this experimental drug should easily generate billions in sales and sport a rock-solid competitive moat as the only telomerase inhibitor on the market.
Turning to the specifics, J&J's biotech wing and imetelstat's main handler, Janssen, decided to continue the drug's trials for MDS and MF without any major changes following an encouraging second internal review last April. While that's certainly good news, J&J has yet to fully commit to imetelstat's development. That's a big concern because Geron would be in deep trouble if J&J backs out. The company, after all, has no other clinical assets, and lacks the financial resources to restart its R&D platform from scratch. So, this speculative biotech is without question an all-or-nothing play.
Looking ahead, imetelstat is close to what could be a watershed moment. Specifically, Geron and J&J are expected to announce a go/no-go decision regarding the drug's late-stage trial in MDS anytime now. And if J&J gives the thumbs-up, Geron's shares should surge higher as a result.
In all, Geron is an intriguing speculative play in the high-growth oncology space. But its unnervingly high-risk profile arguably makes this stock suited for only the most ambitious of investors.
A marijuana stock worth entertaining
Sean Williams (Insys Therapeutics): Ambitious investors looking for big returns have to be willing to take risks, which is why a marijuana stock like Insys Therapeutics could be worth a closer look.
Insys has been nothing short of a mess over much of the past year. Its lead drug, Subsys, is a sublingual spray designed to treat breakthrough cancer pain. At its peak, Subsys was generating north of $300 million in annual sales. However, lawsuits and allegations suggest that perhaps up to 80% of Subsys prescriptions were being written for off-label indications, which is a no-no, and that Insys' sales team was being less than forthright in angling physicians toward the drugs' approved indication. Subsequently, sales of Subsys have tumbled about 50%, and Insys has been logging quarterly losses in situations where it had been producing very healthy profits.
What ambitious investors are bound to like about Insys is the potential for a comeback given the upcoming launch of Syndros, an oral dronabinol solution (essentially a synthetic tetrahydrocannabinol) for the treatment of chemotherapy-induced nausea and vomiting and anorexia associated with AIDS. Though peak sales of the drug vary and the marketplace Syndros is entering is exceptionally crowded, it could very well have peak sales potential of around $300 million, meaning an eventual replacement of Subsys' lost sales.
Additionally, there's strong hope that Insys' management will resolve its Subsys issues with perhaps nothing more than a fine and slap on the wrist. It's unlikely that Subsys returns sales to levels seen in 2015, but a stabilization and modest growth in sales could allow Subsys to comfortably generate $200 million in annual sales, in my view.
If we put two and two together, this could mean about $500 million in pharmaceutical sales annually and a healthy profit. With the company currently valued at roughly $915 million, there could be significant upside if it can once again hit its stride.
A targeted opportunity
Brian Feroldi (ViewRay): Healthcare providers have used radiation therapy for years to battle cancer. However, one big problem with this therapy is that it can be tricky to attack the cancerous cells without damaging healthy ones nearby.
This is a problem that ViewRay is attempting to solve. The company recently won FDA approval for its MRIdian Linac system, which is a product that marries radiation therapy and magnetic resonance imaging (MRI) together. This new system allows healthcare professionals to see how a tumor is reacting to radiation therapy in real time, making it easy for them to make adjustments on the fly. In turn, the company claims that oncologists should have an easier time treating the tumors while minimizing damage to healthy cells.
While we are still in the very early innings of the product's launch, the company recently reported that its backlog in the first quarter grew 62% year over year to $144.9 million. That's great news for investors since it hints that there is a lot of interest in this new system. If true, then ViewRay could be in a great position to steal market share from incumbents.
On the flip side, it's worth pointing out that there's a big difference between growing your backlog and growing your revenue. In fact, ViewRay didn't report any revenue at all during its first quarter. That makes sense since the company can't book the revenue until its systems are actually delivered. That's why it believes that revenue will be heavily weighted toward the back half of the year as it works to fulfill its orders.
Another knock against ViewRay is that its share count is also growing rapidly. Over the past year, shareholders have been diluted by 36% through capital raises. Those moves have helped to grow the company's cash balance to $49.3 million as of the end of March, but since it is losing $10 million a quarter, it is likely that more dilution could be on the way.
Nonetheless, what matters most from here is whether providers will adopt the company's MRIdian Linac system. Given the product's ability to allow radiation oncologists to make adjustments in real time, I think it has a decent chance of stealing market share. That makes ViewRay a high-risk, high-reward stock that should capture the attention of ambitious investors.
