A recent buyout offer for Aimmune (AIMT) from its deep-pocketed collaboration partner, Nestle (NSRGY 0.12%), drove the biotech stock around 172% higher overnight. As is usually the case following one of these lucrative cash deals, lots of investors have started searching the healthcare sector for mid-sized businesses in the hope they'll deliver similar returns.
These two healthcare gems have moved in opposite directions this year, but both look like great stocks to buy now. Here's why.
|Company (Symbol)||Market Cap||2020 YTD Performance|
|Agios (AGIO 0.09%)||$2.9 billion||(14%)|
|CareDx (CDNA -0.41%)||$1.7 billion||59%|
1. Agios: What big pharma wants
This company markets Tibsovo, a targeted blood cancer therapy the FDA approved in 2018 to treat a genetically defined group of acute myeloid leukemia patients. Tibsovo's an easy-to-administer tablet that targets a mutated enzyme called IDH1, which is responsible for driving multiple forms of difficult-to-treat cancer.
Tibsovo sales reached just $27.6 million in the second quarter, but they've been stifled by a limited indication. Recently, Agios published clinical trial results that suggest Tibsovo will soon become a new treatment option for patients with treatment-resistant bile duct cancer. Treatment with Tibsovo reduced these patients' risk of disease worsening or death by 63% compared to those given a placebo.
Tibsovo's just the sort of targeted oral cancer drug that has enticed big pharma companies to open their gigantic checkbooks in recent years, and it isn't the only reason to expect a buyout offer for Agios. The company's late-stage pipeline also boasts a potential new treatment for patients with hemoglobin-related disorders called mitapivat.
Mitapivat's a targeted tablet from Agios that activates pyruvate kinase in red blood cells, which makes it a potential treatment for a variety of hemoglobin-related disorders, including thalassemia and sickle cell disease. Mitapivat's currently in late-stage trials as a potential new treatment for pyruvate kinase deficiency, and a repeat of its previous success in mid-stage testing could make it the second Agios drug to earn approval.
2. CareDX: Transplant specialist
Testing patients for signs of organ rejection following a transplant is an often-overlooked corner of the healthcare sector that has improved by leaps and bounds in recent years, thanks in part to CareDx. This company markets an array of noninvasive testing services for organ transplant candidates and recipients.
Instead of relying on a biopsy to see if a patient's immune system has started rejecting transplanted organs, CareDx's tests do the job with an easy blood sample. Despite COVID-19 lockdowns, CareDx provided over 17,100 kidney and heart tests in the second quarter of 2020, leading to a 41% year-over-year revenue gain for the company's testing services segment.
There's plenty of room for CareDx to continue growing at a rapid pace. In 2019, over 39,000 transplants were completed in the U.S. alone, and each patient that receives one requires regular monitoring for the rest of their life, or at least until the new organ's removed.
Agios' research and development expenses alone are three times higher than product revenue from Tibsivo, but CareDx is already close to breaking even. After adjusting for some noncash expenses, the company reported a modest profit of $1.7 million in the second quarter of 2020.
CareDx completed a secondary offering in the second quarter that left the company flush with $211 million in cash and cash equivalents, and it will probably be the last time the company needs to dilute the value of outstanding shares to make ends meet.
Stay safe out there
Without a buyer, Agios' sales could falter -- and there's no guarantee CareDx's transplant services will continue to succeed, either. With regular revenue already, these mid-cap healthcare stocks are much safer than a lot of their smaller cousins, but that doesn't mean they're safe enough to put in a portfolio that isn't backed up with some diversification.