Stocks with share prices under $5 are rarely worth owning. On the rare occasion, however, small-cap healthcare stocks can be glaring exceptions to this general rule.
Novavax (NVAX -3.15%), Geron Corp. (GERN 3.77%), and Rite Aid Corporation (RAD 12.50%), for example, have all been through some seriously stormy weather that's crushed their share prices. With better days possibly on the horizon, though, these three beaten-down healthcare stocks could mount historic comebacks. Let's dig deeper to find out why.
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Novavax: Down, but not out
Heading into the late-stage readout for its respiratory syncytial virus (RSV) fusion protein nanoparticle vaccine candidate in elderly adults, Novavax was a Wall Street darling. The vaccine's strong mid-stage results, after all, seemed to indicate that the company was close to bringing a multibillion-dollar product to market.
Then disaster struck. The vaccine badly missed its primary endpoint in this all-important trial, and Novavax's share price imploded as a result.
According to the company, the vaccine's dismal late-stage results in elder adults can most likely be attributed to an extremely mild RSV season during the course of the trial. As a result, management quickly decided to launch yet another mid-stage trial assessing different dosing regimens of the vaccine in older adults. And with this trial nearing a top-line readout of its own, the fate of the vaccine's elderly adult indication could be known sooner rather than later.
Long story short, if Novavax is proved correct in that the underlying problem was a mild RSV season and not a lack of potency in the vaccine itself, this stock could rebound in a big way. This vaccine's peak sales were pegged to reach upwards of $2 billion, after all, if it's approved for both maternal immunization and in older adults as a preventative treatment for RSV. That sales projection dwarfs Novavax's present market cap of $418 million.
Geron: A novel cancer stock
The cancer drug market is the fastest growing therapeutic area right now, thanks to several breakthroughs for various hard-to-treat malignancies. One unfortunate offshoot of this innovation boom, though, is that numerous drugmakers are trying to simply imitate the success of their rivals in areas such as immune-modulating antibodies, cell therapies, and kinase inhibitors. The net result is a glut of medicines that largely fail to cover new territory.
The small-cap biotech Geron, however, is bucking this trend by developing a best-in-class telomerase inhibitor called imetelstat, which is racing toward critical clinical milestones for its ongoing trials in the blood disorders myelodysplastic syndrome and myelofibrosis. These two initial indications have the potential, at least on paper, to transform imetelstat into a blockbuster product.
Even so, the market clearly isn't a big believer in this juicy value proposition, and perhaps for good reason. Geron's current market cap of $445 million appears to reflect the market's deep suspicion of unproven cancer therapies in general. And that's arguably a reasonable stance, given that the vast majority of experimental cancer therapies flame out during clinical trials. In other words, imetelstat's chances of actually reaching the market are exceedingly slim -- that is, if history is any guide.
Rite Aid: Smaller but more efficient
Rite Aid's stock has been in freefall mode ever since its merger with Walgreens Boots Alliance fell through in late June, and subsequently metamorphosed into an asset sale. The unimpeded stampede out of this embattled drugstore-chain stock, though, may be way overdone at this point, for a couple of reasons.
Image source: Getty Images.
First off, Rite Aid is walking away with roughly $5.5 billion from its asset sale with Walgreens. That's a nice chunk of change that can be used to both help the company get out from underneath its crushing debt levels and remodel its remaining stores to install attractive features such as the Wellness layout.
Another key issue is that Rite Aid can now buy generic drugs sourced through Walgreens at cost for a period of 10 years. This arguably under-appreciated aspect of this asset sale should help the company improve margins in a meaningful way. Generic drugs, after all, have steadily made up a larger and larger percentage of total U.S. prescriptions over the past decade, and this trend is expected to continue as more branded drugs lose patent protection.
But Rite Aid is still in a difficult position. The company lacks the size necessary to negotiate from a position of strength with third-party payers regarding prescription drug prices, and this divestiture of around half its stores certainly doesn't help with this touchstone issue.
But this sizable influx of cash should at least help it delever, regroup, and perhaps return to growth as a more efficient operation overall. So if management plays its cards right, Rite Aid could conceivably transform into an outstanding comeback story.
Are any of these "cheap" stocks worth buying right now?
These three healthcare stocks all have sub-$5 share prices for very good reasons. But if you're comfortable with a healthy dose of risk, each stock does offer considerable upside potential. Novavax, if the stars align with its RSV program, could come roaring back. Geron is in position to potentially capture a big chunk of the multibillion-dollar blood cancer market. And Rite Aid's comeback story as a smaller yet more efficient organization has a real shot at success.
While these beaten-down stocks do have rather attractive upside potentials, however, they could all crash if things don't go according to plan. In other words, these are not stocks well suited for conservative investors, to put it mildly.
