If you're a healthcare investor looking for something new, 2019's been a banner year. Most of us have never heard of BridgeBio (BBIO 0.32%) or Change Healthcare (NASDAQ: CHNG) largely because they didn't begin trading on public markets until this June.
In several short weeks, both have captured the imaginations of Wall Street investment banks. A batch of positive analyst ratings recently pushed these fledgling healthcare start-ups into the spotlight.
When it comes to predicting stock movements, investment bank analysts are generally awful, but it's still important to understand the basis for their enthusiasm. This time they could really be on to something.
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BridgeBio Pharma: Streamlining the process
The development process for most drugs begins with a research-driven organization that spends a lot of time and effort trying to convince profit-driven investors it can turn that research into a successful commercial-stage product. BridgeBio Pharma is actively engineering a streamlined development process that involves a growing roster of subsidiaries, each of which can share resources with the entire team.
Beyond easy access to financing, BridgeBio even supplies some of its subsidiaries with executive management. For example, BridgeBio founder and CEO, Neil Kumar, serves as CEO of Eidos Therapeutics (EIDX) and the pair of companies also share the same chief scientific officer, Uma Sinha.
BridgeBio invested $1 million into Eidos in 2016 and has since raised its investment by roughly $73 million. That led to a 65% stake in Eidos at the end of 2018, which is already worth about $725 million.
Since its subsidiaries don't need to beg, borrow, or plead for basic necessities, each tendril of this octopus can remain hyper-focused on moving its new drug candidate through the development process at top speed.
As an investor, there's a lot to like about this process because employees at BridgeBio subsidiaries have far less incentive to hide early signs of trouble. Partly because terminating the program they're currently working on simply frees them up to work at another subsidiary with something more promising in the pipeline.
Lots of biotechs claim to have a more efficient way to discover and develop drugs, but I've never seen one transform an attractive theory into results as quickly as BridgeBio. The holding company was founded in 2015 and its subsidiaries already have 15 active rare-disease programs in development, four of which are already in registrational studies.
BridgeBio's largest subsidiary, Eidos, has already passed milestones that took larger drugmakers over a decade, and investment bank analysts up and down Wall Street have noticed. Jefferies, Goldman Sachs, and J.P. Morgan were just a few of the big banks that recently initiated coverage of the stock with a positive rating. If BridgeBio's subsidiaries keep advancing their individual pipelines at their present pace, this company's $3.4 billion market cap could quickly swell to several times its present size.
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Change Healthcare: Reducing costs
The prescription drug distribution business isn't one you associate with big data, but America's largest distributor, McKesson (MCK -0.27%) owns 70% of this recent spinoff. McKesson offered the other 30% of its healthcare information business to the public at the end of June and the stock has already racked up more positive recommendations than BridgeBio.
Recently, Bank of America, Citigroup, and Goldman Sachs became enamored with the company's position in a growing market and gave rated the stock a buy. Change Healthcare also received overweight ratings from JPMorgan, Cantor Fitzgerald, and Barclays for similar reasons.
When it comes to selling potential efficiency gains and ways to cut waste, the company with the most data will have a big advantage. After processing nearly 14 billion transactions and adjudicated claims adding up to around $1 trillion during the year ended March 31, 2018, it looks like that company will be Change Healthcare. This giant of healthcare information already has a hand in roughly one-third of all healthcare expenditures that occur in the U.S. plus it has access to clinical records for around one-third of the population.
Investors can reasonably expect demand for healthcare information to rise for the long run. An aging U.S. population with lots of chronic conditions to manage is expected to raise healthcare spending from $3.6 trillion in 2018 to $6.0 trillion by 2027. At recent prices, Change Healthcare's market cap is around $1.8 billion which seems reasonable for a market leader with a sticky business model and rising operating profits on pace to reach $489 million this year.
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Great vehicles for riding healthcare's strongest trends
In a sense, Change Healthcare is a bet healthcare usage will continue rising in the U.S., which might be the safest prediction you can make right now.
BridgeBio has plenty of room to grow too. The company's focused on disorders caused by a single gene, an estimated 10,000 of which still lack effective treatment options.
These may be two of the youngest healthcare stocks on a major exchange, but both have what it takes to deliver market-thumping gains over the long run.
