Healthcare has been the story for much of 2020 because of the coronavirus pandemic. Many stocks have soared thanks to advances in gene-based drug development, a shift to virtual health, and the potential for billions of tests and doses of treatments and vaccines for a disease that didn't exist until a year ago. As vaccines get closer to approval, it's natural for investors to shift their attention to the next hot sector.
Shares of companies that have jumped in 2020 are already experiencing increasing volatility as Wall Street tries to decide whether to hang on or get out before life goes back to normal. But not all of the companies that have risen during this tragedy will go back to normal. Below are three healthcare stocks to buy right now, before investors realize that the long term offers a lot more potential for growth than just the 2020 pandemic. Dexcom (DXCM 0.33%), Quidel (QDEL), and BioNTech (BNTX -0.27%) all experienced fantastic share appreciation as COVID cases exploded. But the stocks have drifted downward, and I believe each offers a growth story with many years to go.
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1. Dexcom
It's hard to find anything wrong with Dexcom. The maker of continuous glucose monitoring systems pioneered the market for the devices and has continued to innovate for patients in its 21 years.
While 4.4% of the U.S. population had diabetes in 2000, that number had risen to 7.4% by 2015 -- more than 23 million people. That growth has fueled sales of the company's monitoring systems, growing revenues at 43.5% compounded annually over the past decade to $1.8 billion over the past 12 months.
Although the stock is up nearly 50% year to date, it is down 27% from its highs in August. The company faces competition from a recently approved Abbott Laboratories glucose monitoring product, but Dexcom has a new unit on the way. Despite the growth to date, management believes new markets represent an opportunity five times bigger than the current core markets. This tells me there is room for more than one winner in glucose monitoring.
Unfortunately, the diabetes epidemic shows no signs of abating. In 2019, an estimated 463 million adults were living with diabetes. That number is expected to rise to 700 million by 2045. Dexcom shareholders will likely be rewarded by decades of growth ahead.
2. Quidel
Quidel was one of the few companies with a test for COVID-19 early in the pandemic -- it was approved on March 17. Because of this, the company's sales and shares have skyrocketed. Third-quarter revenue increased 276% year over year to $461 million. Those sales contributed to the $852.5 million in the first nine months of 2020, a 123% increase compared to last year. Understandably, that sales growth has driven the stock up 150% in 2020 so far. While impressive, I believe the gains are far from over for this diagnostics company.
The company has loosely estimated the demand for its COVID-19 tests at 685 million per year. Management expects to ramp up to a run rate of 50 million tests per month in 2021 to meet that demand.
Before COVID, the company was already positioned for substantial growth. Sales had grown from $192 million in 2016 to $535 million in 2019, and its Savanna testing device -- a mid-2021 planned launch -- offers another avenue for growth in the $8.6 billion molecular diagnostics market.
Quidel also has a strong foothold in the cardiac and seasonal virus categories. With proprietary devices and platforms across growing testing markets, I believe shares are attractive. Quidel reminds me of other healthcare companies like Illumina and Intuitive Surgical that sell machines as big-ticket purchases, then generate high-margin recurring revenue with the consumables those machines use. Quidel may never reach the size of those companies, but it's a great business serving many growing markets.
3. BioNTech
Pfizer (PFE -0.12%) gets most of the headlines with respect to the COVID-19 vaccine that the companies developed in partnership. It is, after all, a 170-year-old blue-chip company, and BioNTech has never made a profit. The two expect to produce 1.3 billion doses of the drug by the end of 2021, charging about $20 per dose. The benefits of the pending approval for a COVID vaccine are obvious, but the German biotech has much more to offer than the headline-grabbing vaccine.
The company is also partnering with Pfizer on a vaccine for the seasonal flu. In most years, the flu vaccine is 40% to 60% effective, and the two companies think they can use the messenger RNA (mRNA) technology that has worked so well for the COVID vaccine to boost its efficacy. If they can get the flu vaccine to be as effective as the COVID vaccine reportedly is, it could potentially take the lead in the $4.45 billion market to prevent the seasonal virus.
BioNTech is also working with several partners on cancer treatments including Roche Holdings' Genentech unit, Genmab, Sanofi, and Regeneron. At least one analyst thinks any of those could become billion-dollar sellers. With the COVID-19 vaccine validating messenger RNA as a drug platform, shares in BioNTech could just be starting decades of outperformance.
