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3 Healthcare Stocks With Rising Expectations

By Cory Renauer - Aug 10, 2019 at 12:01PM

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For a few companies, the second half of 2019 will probably work out better than investors dared hope for earlier this year.

If you're looking for stocks largely unaffected by international trade tensions, you'll find the healthcare sector's full of them. In fact, Flexion Therapeutics (FLXN), Guardant Health (GH -4.84%), and CVS Health (CVS -1.42%) recently surprised investors by raising their 2019 earnings estimates above figures provided earlier this year.

Raising forward guidance halfway through the year is usually a positive signal. Before getting too excited, though, let's take a closer look at these businesses and the sources of their optimism to see if they can keep growing.

A family moving up a climbing wall.

Image source: Getty Images.

1. Flexion Therapeutics: Knee pain relief

Millions of older Americans suffer from knee pain caused by arthritis, and many of them have started lining up to receive regular injections of Flexion's lead drug, Zilretta. This pain relief formula slowly releases triamcinolone acetonide, an old steroid generally used to relieve topical inflammation, directly into the knee for about three months.

Arthritis patients who never imagined they'd feel relief have a lot in common with Flexion shareholders, who had seen their shares lose around 60% of their value over the past year. The stock has perked up recently because the Zilretta sales ramp investors cheered after the first quarter continued through the second. Compared to the previous-year period, second-quarter Zilretta sales rose 347% to $17 million, which was also 60% more than during the first quarter.

In May, the company paused a phase 3 trial that could help expand Zilretta's audience to include people with hip pain. The company plans to start Zilretta's expansion study again before the end of 2019, and it could begin a human proof-of-concept study with a new experimental gene therapy in early 2020.

Two people in full lab outfits with masks and gloves look through microscopes in a lab.

Image source: Getty Images.

2. Guardant Health: Liquid biopsy leader

Guardant Health shares had already soared 181% since they began trading last October, and a glowing second-quarter earnings report recently pushed them up even further. Revenue soared 178% compared to the previous-year period to $54 million. That was more than anyone was expecting, which led management to raise its 2019 revenue guidance range to between $180 million and $190 million from the guided range of $145 million to $150 million provided just a few months earlier.

There are lots of terrific new cancer treatments that work well against tumors driven by specific mutations, but figuring out which mutations are driving an individual's disease isn't always a feasible option. For example, lung cancer patients with tumors that spread to their brain often receive standard care without any genetic profiling because opening up a chest or skull to retrieve a sample is usually more trouble than it's worth.

Guardant Health's lead service, Guardant360, looks for floating DNA strands that have broken free from tumor cells. There is no substitute for putting a tissue sample under a microscope, but Guardant360 is capable of recognizing specific mutations that biopsies often miss.

Guardant Health thinks fewer than 15% of cancer patients across the board ever have their tumors profiled. With around 700,000 cancer patients in the U.S., Guardant360 has a lot of room to grow, and there's a good chance the company will be able to launch blood-based cancer-screening solutions for healthy people in another year or two.

3. CVS Health: Merger executed

CVS Health stock had fallen 33% since it bought Aetna, one of America's largest health insurers, for a whopping $77 billion last November. The company had to freeze its dividend to manage the big acquisition, but second-quarter results suggest a return to blazing-fast payout increases will come along sooner than expected.

CVS Health operates America's largest pharmacy benefits manager, plus 1,100 walk-in clinics scattered throughout 9,900 retail pharmacies in North America. Marrying these services to a giant healthcare benefits provider that they already interact with always sounded like a great way to cut costs, but nobody seemed to believe that CVS Health could pull it off.

Second-quarter adjusted earnings that came in around 10% above the company's own expected range suggests that CVS Health executed the merger with more precision than anyone expected. Management even had to raise its 2019 adjusted earnings guidance range from between $6.75 and $6.90 per share to $6.89 and $7.00 per share.

In the second quarter, operations generated a whopping $5.3 billion, which allowed CVS Health to make $600 million in dividend payments without breaking a sweat. The company won't raise its dividend payout again, though, until its debt-to-earnings ratio falls a little further. Since the close of the Aetna transaction, the company has already knocked $6.6 billion off from its debt pile, and at this rate, CVS Health could begin raising its payout again in late 2021.

A favorite

In case you're wondering which of these healthcare stocks has the best chance to outperform for your portfolio: Flexion and Guardant have potential to soar, but there's also a great deal of risk because neither company is making ends meet at the moment.

At recent prices, CVS Health shares offer a nice 3.4% yield that could begin rocketing higher once it directs its massive cash flows away from debt repayment and back toward shareholders. Right now, CVS Health looks like a great stock for conservative investors in search of a bargain.

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Stocks Mentioned

CVS Health Corporation Stock Quote
CVS Health Corporation
$93.20 (-1.42%) $-1.34
Flexion Therapeutics, Inc. Stock Quote
Flexion Therapeutics, Inc.
Guardant Health, Inc. Stock Quote
Guardant Health, Inc.
$42.26 (-4.84%) $-2.15

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