West Pharmaceutical Services (WST 0.89%), Five Prime Therapeutics (FPRX), and Fulgent Genetics (FLGT 0.98%) all have had a good run this year but are poised to climb higher. While two of them have benefited from significant pandemic tailwinds, none are "COVID stocks" in the sense they have a lot more going for them.
You may not have heard of any of these companies. Fulgent Genetics and Five Prime are small-cap stocks while West Pharmaceutical is a large-cap that just made the jump this year from mid-cap. That may explain why despite their growth, they are not overvalued, in my opinion.
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West Pharmaceutical is showing consistent growth
West Pharmaceutical Services was doing well before the pandemic, but will really benefit when a COVID-19 vaccine begins to be distributed sometime next year. The Exton, Pennsylvania, company makes delivery systems for injectable medicines, such as pre-filled syringes, vials, and self-injectable systems, for patients with chronic conditions like diabetes and some cancers, autoimmune disorders, and blood disorders.
Its stock is up more than 80% year to date, driven by its consistent growth. West is on track for a fifth consecutive year of revenue and net income growth and has had five consecutive quarters of revenue growth.
In the third quarter, West Pharmaceutical reported $548 million in sales, up from $456 million in the same quarter in 2019. The company's net income was listed as $82.3 million, compared to $56.3 million, year over year. At the nine-month mark, its listed financials were ahead of last year's, with $1.56 billion in sales, up 14% year over year, and net income of $247.8 million, up 39.3%.
West Pharmaceutical said its COVID-19-related sales have made up for the drop in the need for its products related to dental and elective surgeries that trailed off when the pandemic began. The company anticipates that once elective surgeries pick up again, the other side of its business should as well.
Five Prime Therapeutics is one to watch
Shares of Five Prime Therapeutics, a South San Francisco, California, clinical-stage biotech company, are up more than 280% this year.
The company focuses on therapies to fight solid tumor cancers. It has a growing pipeline with a promising lead candidate in stomach cancer drug bemarituzumab, which it is developing in a partnership with China's Zai Lab. The drug showed positive results in a phase 2 study treating gastric and gastroesophageal cancers when combined with chemotherapy. In the study, the drug met efficacy goals and extended by more than two months the median time it took before the cancer worsened.
According to the Cancer Research Institute, stomach cancer is considered the fifth most common form of cancer worldwide and the third most lethal form of cancer. The overall five-year survival rate for stomach cancer is 32%, according to the American Cancer Society, but for those diagnosed at the later stages of the disease, the five-year survival rate drops to 5%.
Those sobering numbers explain why positive data for a 155-person trial was met with such enthusiasm by the market. On Nov. 11, the company's shares rose 335% after the bemarituzumab study results were announced after the close of the market the previous day.
Five Prime said in a release it is possible the drug may also be effective in other solid tumor types of cancers. The company has three other solid tumor drugs in phase 1 trials: FPT155, FPA157, and FPA 150, plus TIM-3, an immune checkpoint receptor, which it is developing with Bristol Myers Squibb.
The biggest concern for Five Prime is getting its lead drug across the finish line. The 10-year-old company hasn't made a profit for the past four years and lost $26.4 million in the past quarter. Fortunately, the $112 million in cash it had at the end of the third quarter was given a big bump by a recent public offering, in which the company said it made $173.9 million in gross proceeds.
Fulgent Genetics is a high flyer that's underpriced
Fulgent Genetics, based in Temple City, California, does genetic diagnostic sequencing using the DNA taken from blood to diagnose certain diseases and for neonatal and prenatal screening. The company's tests are also used to determine if patients have COVID-19. Fulgent's stock has climbed more than 260% in the past year because of its top and bottom-line growth.
In 2019, the company had $32.5 million in revenue. This year, the company said it expects to make at least $300 million in revenue because of accelerated demand for its COVID-19 tests. Through three quarters, the company reported $126.7 million in revenue, compared to $24.1 year over year. Its net income, through three quarters, is listed at $48 million, compared to a loss of $1.1 million in the same period in 2019.
The company's shares trade at only nine times expected earnings. Compared to most growth stocks, that's a bargain. Even with vaccine candidates on the way for COVID-19, the need for Fulgent's COVID-19 tests will continue for a while. On top of that, the market for genetic diagnostic testing is expected to grow. According to a report by Grandview Research, the global DNA sequencing market size was valued at $4.7 billion in 2019 and has a likely compound annual growth rate of 11.4% through 2027.
The choice comes down to your philosophy
I recommend all three healthcare stocks, but for different reasons and for different investors.
Five Prime Therapeutics has vast growth potential, particularly in the long term, but like any clinical-stage biotech, it carries a good deal of risk. The company has a lot riding on bemarituzumab, but if the drug is effective as a therapy against several types of solid tumors, the investment will be well worth it.
West Pharmaceutical Services is a company that was already doing well and has been able to survive the pandemic while finding a way to grow its business. To me, this one is more for momentum-based traders who are looking for a solid, steady choice with potential for growth.
Fulgent Genetics may be the best of the three over the next year, at least. I think it is set up to do well in an expanding field, and in the meantime has seen enormous upside from COVID-19 testing that should continue well into 2021.
