Despite a painful market correction in March and a bevy of weak earnings reports stemming from the COVID-19 pandemic across the market, healthcare stocks are flourishing like never before. Between companies developing therapeutics or vaccines and companies offering diagnostic tests for COVID-19 at the scale public healthcare systems require, the healthcare market is packed with new opportunities for investors.
Thermo Fisher (TMO -1.10%) and Roche (RHHBY 0.93%) are two leading conglomerates benefiting from the increasingly dynamic coronavirus market by producing diagnostic tests for COVID-19. Investors seeking growth have a difficult decision to make. Both organizations responded promptly to the pandemic by developing and launching new products, initiating new collaborations, and acquiring promising companies to fuel future efforts. But does one of these competitors have a clear edge over the other in the context of the fight against COVID-19?
Thermo Fisher moves fast to supply tests and laboratory solutions
Thermo Fisher's reaction to the pandemic has been to stick to its areas of greatest competency: sterile manufacturing and research tool development. With a profit margin of 14.3%, $2.98 billion cash in hand, and only $20 billion in debt, the company is well-positioned to expand comfortably into the new markets created by the pandemic.
Thermo's COVID-19 diagnostic test was approved in March and immediately put into action. Later, Thermo received emergency use authorization for its antibody test for prior COVID-19 infections and also expanded its emergency use authorization for its diagnostic tests. Rapidly exploiting the new COIVD-19 testing market will likely boost Thermo's earnings expansion beyond its current 1.7% year-over-year quarterly revenue growth.
The company's products targeted at COVID-19 researchers are it shines brightest. Thermo's research-use only diagnostic test was one of the first on the market. Soon after, Thermo released a product designed specifically for validating in-development prototypes for COVID-19 diagnostic tests.
Thermo also acquired genetic testing company Qiagen for $11.5 billion in the culmination of a deal that was hinted at starting in late 2019. Qiagen's products are ubiquitous in biomedical laboratories worldwide, and the company also produces a rapid COVID-19 testing kit that Thermo will add to its repertoire. Thermo's leadership has high hopes for the Qiagen acquisition, with an expected $200 million in cost reductions and revenue gains by the third year after the deal's closure.
Roche pushes forward with its COVID-19 diagnostics while gearing up to test therapies in the clinic
Roche has made substantial progress with its COVID-19 product pipeline, starting with diagnostic tests. Roche entered the COVID-19 testing market in mid-March after obtaining an emergency use authorization from the U.S. Food and Drug Administration (FDA). Roche's tests were administered to roughly 4 million people by April, with some patients paying as little as $5 per test.
Shortly after starting sales of its diagnostic test, the company initiated an expedited phase 3 clinical trial to investigate whether its antibody therapeutic, tocilizumab, could improve outcomes for patients with severe pneumonia resulting from COVID-19. There hasn't been any data released from the trial yet, but Roche's stock price will surely react accordingly when the time comes.
Even if Roche's COVID-19 therapeutic project reports unfavorable results, investors may still find good news in the company's next quarterly earnings report if it is anything like the last one, when the company reported 52.9% year-over-year quarterly earnings growth and 6.8% year-over-year quarterly revenue growth in addition to a profit margin of 21.2%.
In early June, Roche also obtained an emergency use authorization for an immunological test which helps doctors determine whether patients with confirmed cases of COVID-19 will be at higher risk for death if they are on a ventilator. While this test may not be as lucrative as basic diagnostic tests for COVID-19, it's still a sign that Roche is invested in finding solutions for every element of the diagnostic and treatment chain.
Which company is the better coronavirus stock?
Overall, Roche is the better coronavirus stock because it is exposed to a large upside stemming from the company's COVID-19 therapeutic development efforts and because its performance as a stock has slightly exceeded Thermo's during the pandemic so far. While both companies have grown in value over the last few months, Thermo's dividend yield of 0.26% is unlikely to excite many investors compared with Roche's 2.66%.
Similarly, while Thermo may be exposed to less downside risk because it's not involved in therapeutics development, the widespread competition the company faces in the diagnostic market means it doesn't have a chance of capturing the same revenues as Roche would if it was the first to market with a COVID-19 treatment.