In September, investors learned that you don't need profits to put up tremendous gains. In fact, all three of the healthcare sector's best-performing stocks are underpinned by businesses that consistently lose money.
Amarin Corporation plc (AMRN 7.92%) and Tilray, Inc. (TLRY) climbed in September, but do they have what it takes to keep climbing? Let's look at what needs to happen if these stocks are going to rise much further over the long run.
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Amarin Corporation plc: Thanks, fish
Shares of this biotech stock exploded by 466% in September in response to surprising clinical trial data for a fish oil capsule called Vascepa. We already knew it effectively lowered triglycerides, but we had no idea how well it reduced the risk of ending up in the hospital, or worse.
Patients already taking statins for their LDL cholesterol who added Vascepa to their daily routine were 25% less likely to have a major cardiovascular event than those kept on statin therapy alone. Millions of Americans fit this profile, and so far Vascepa's trial results seem like the sort that inspire doctors to take action.
Don't look for Vascepa sales to spike right away. At the moment, all we know about Amarin's outcome trial success comes from a single line in a press release, which means there could still be caveats that change how we feel about this drug.
There are heaps of different fish oil pills, but all have failed to show a significant benefit in clinical trials, possibly because they contain more than one omega3 fatty acid. Vascepa contains just one, and it looks as if Amarin will be the only company able to sell it for well over a decade.
This stock could continue its climb, but only if the medical community likes what it sees during an upcoming medical conference. On Nov. 10, Amarin will present more details that could send the stock soaring further, or crashing back to earth.
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Tilray, Inc.: Recreational pot sales ahead
This Canadian marijuana supplier has been growing a lot more than cannabis lately. Tilray Inc.'s stock price expanded by 122% in September, as investors got excited about this month's rollout of legal recreational pot sales in Canada.
By the end of 2018, Tilray expects to have more than 850,000 square feet of growing capacity, or enough to produce around 100,000 kilograms of cannabis annually. In the second quarter, Tilray recorded a net selling price of $6.38 per gram, which was more than the previous year's period because of higher sales of expensive cannabis oil.
Tilray already has supply agreements with seven provinces and territories, including Ontario, Quebec, and British Columbia. Tilray also has agreements with Novartis to collaborate on the sale of medical cannabis products, and supply agreements with pharmacy chains to supply medicinal use products.
Medicinal marijuana generally sells for a higher price than the recreational sort, and branded oil capsules could become a steady source of revenue for Tilray. A focus on medicinal markets in Canada, and abroad, gives this company a better chance of surviving an oncoming supply glut than many of its larger peers.
Although there's always a chance that Tilray will attract a deal similar to one that recently drove up shares of Canopy Growth, investors expecting further gains should prepare for disappointment. Selling all the marijuana it can produce next year would lead to around $638 million in annual top-line revenue, if prices don't fall. Unfortunately for today's shareholders, Tilray will need to sell a lot more than 100,000 kg per year if its stock price is going to rise any further over the long run.
The most likely climber?
If either of these stocks is going to climb further, it will probably be Amarin. Heart disease is still the leading cause of death in the U.S., and around one-third of adults have triglyceride levels considered too high. At around $1,500 per year, Vascepa could easily generate 11-figure sales if a reasonable share of Americans who need to lower their triglycerides end up making it part of their daily routine.
Tilray's accomplishments are impressive for such a young company, but they don't justify a $13.5 market cap that's around 21 times a best possible scenario for total sales in 2019. Fast-growing companies with profits rarely trade at double-digit multiples of sales expectations. Tilray's operations lost $15 million in the first half of the year and could continue losing money if demand for marijuana doesn't exceed supply.
