There are plenty of interesting healthcare stocks to choose from on the market right now. Whether they be small-cap biotechs, large-cap pharmaceutical giants, or anything in between, investors have no shortage of interesting investment possibilities to consider.
Two stocks that you might have heard of are Exact Sciences (EXAS -5.83%) and Bio-Rad Laboratories (BIO -1.27%). They are similarly sized with market caps above $10 billion. Exact is focused on developing early detection diagnostics to identify signs of colon and rectal cancer in patients. Bio-Rad also develops diagnostic equipment but has a much broader scope and isn't focused on one particular condition like Exact Sciences.
While both companies have their pros and cons, is there a clear winner between these two healthcare companies?
Image source: Getty Images.
What's behind Bio-Rad's growth?
Over the past 12 months, shares of Bio-Rad have risen 34%, handily outperforming the S&P 500's 12% gain during the same period. The company offers more than 10,000 products across a variety of different areas.
For simplicity's sake, the company's business can be broken down into two main segments: life science and clinical diagnostics. Life science includes developing reagents, laboratory apparatuses and instruments, and similar equipment used by medical labs and research organizations around the world. Its customers include universities, medical schools, research groups (private and public), and pharmaceutical drug makers.
Clinical diagnostics also involves selling to clinical labs, but with an emphasis on specific diagnostic tests including in vitro diagnostics, a type of test done on blood or tissue samples to detect diseases. Bio-Rad offers over 3,000 different diagnostic test products to laboratories.
Both of Bio-Rad's main business segments are reporting decent growth figures, although the numbers themselves might not be all that exciting. Revenue from the company's life science segment is up 1.8% on a currency-neutral basis, while clinical diagnostics is up 2.8% as well from last year. Growth, while a bit slow, is steady for Bio-Rad, and that's despite operating in a highly competitive market with rivals like Abbott Laboratories and Roche.
The case for Exact Sciences
In contrast to Bio-Rad, Exact Sciences has performed relatively poorly over the past 12 months, having lost 6% of its value over that period compared to the S&P 500's 12% gain. Exact focuses on providing cancer diagnostic tests and products in the colorectal market, with its most iconic product being Cologuard, a noninvasive colon cancer diagnostic test. Sales for Cologuard have been surging, with 447,000 individual tests ordered in the fourth quarter of 2019, up 63% from Q4 2018.
Cologuard. Image Source: Exact Sciences
Exact completed its $2.8 billion acquisition of a molecular diagnostics company called Genomic Health in November. The deal is seen as an excellent way to expand given the similarities between the two companies. Genomic Health has its own successful product, the Oncotype DX diagnostic test, which determines the likelihood of breast cancer reoccurring in previously diagnosed women and predicts how that cancer is likely to respond to different treatments. Although the Oncotype DX isn't a noninvasive test -- it requires a tissue sample -- it's still a highly sought-after product by medical professionals and labs around the world.
Breast cancer and colorectal cancer are two of the most common cancer types around the world, accounting for approximately 2.1 million and 1.8 million new cases in 2018 respectively. Adding the Oncotype DX to Exact's Cologuard gives the company two major selling products with significant growth potential.
This growth potential is seen in the company's revenue figures, which have more than doubled over a one-year period. While the company is essentially operating at a loss (without income tax benefits pushing the company into the positive for this quarter), Exact has plenty of growth potential going forward.
Looking at the financials
Despite being similarly sized, Bio-Rad and Exact have radically different financials. At first glance, Bio-Rad's top-line revenue growth looks like it would belong to a blue-chip healthcare stock. However, a deeper look reveals that the company has seen a significant shift in profitability over the past year.
Bio-Rad's fourth-quarter revenue came in at $624.4 million, up 2.3% on a currency-neutral basis. Bio-Rad has a reasonable operating margin of 9.5% and a net income of $553.5 million. This is a massive turnaround from the $828.5 million net loss reporting in Q4 2018, so while top-line growth seems relatively stable, the bottom line has seen a massive shift over just 12 months.
| Metric | Market Cap | Quarterly Revenue | Revenue Growth (%) | Net Income (Loss) | Price-to-Sales Ratio (P/S) |
|---|---|---|---|---|---|
| Bio-Rad | $12.3 billion | $624.4 million | 2.3% | $553.5 million | 5.3x |
| Exact Sciences | $15.1 billion | $295.6 million | 106.7% | $77.9 million | 15.5x |
Data Source: YCharts, Bio-Rad, Exact Sciences.
Exact Sciences is the opposite in this regard. Fourth-quarter revenue reached $295.6 million, more than double the $143.0 million reported in Q4 2018. While the company did technically report a profit of $77.9 million, this appears to be a one-time occurrence due to a hefty income tax benefit. Without this $184.6 million tax benefit, the company reported a fourth-quarter net loss of $106.7 million, which is significantly worse than the $53.9 million net loss seen a year ago.
The difference between the two stocks becomes even more apparent when looking at their price-to-sales (P/S) ratios. Exact trades at a 15.5 P/S ratio, while Bio-Rad trades at only 5.3. Investors can look at this and conclude that Bio-Rad is comparatively cheaper, but it also means that Exact trades at a premium, and for good reason. The company has seen major revenue growth, which Bio-Rad hasn't.
Which is the better buy?
Whether Bio-Rad or Exact Sciences is right for you depends largely on what you're looking for. If you are interested in a stable, slower-growing, more established healthcare stock, Bio-Rad fits the bill. The only thing that could be uncomfortable for a risk-averse investor is the company's dramatic shift in the bottom line. However, the stock trades at a pretty cheap valuation, which is quite appealing.
On the other hand, if you're more of a growth investor, Exact Sciences would be the better pick. Exact has seen a significant increase in revenue, and with the addition of Genomic Health's Oncotype DX product, revenue growth is expected to surge even more. The company isn't profitable yet (at least when you factor out one-time tax benefits), but that's par for the course when looking for a growth-oriented company.
Since I tend to prefer a higher-risk approach to investing, I'm going to go with Exact Sciences as the better buy today. Besides all the aforementioned reasons, it's nice to know that the company's products have relatively little competition in the market. That can't be said for Bio-Rad, which competes with behemoths like Abbott Laboratories.
