Looking for investment opportunities in the healthcare sector, and particularly in the biotechnology industry, can be overwhelming if you're not intimately familiar with the space. However, it makes a lot of sense to look for companies that offer natural diversification and safety to investors through their unique operations.
Here are three companies that operate surprisingly diverse operations -- either through drug pipeline variety, customer diversification, or differentiated product verticals -- offering a safety net, as well as prospects for growth, to their shareholders as a result.
Despite their smaller size, these under-the-radar healthcare stocks have promising risk-reward prospects and are three of my favorite picks heading into 2022.
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1. 23andMe
Led by its mission "to help people access, understand, and benefit from the human genome," 23andMe Holding (ME -5.39%) has quietly identified over 40 therapeutic programs from its treasure trove of genetic data. Thanks primarily to its partnership with GlaxoSmithKline, the company already has one drug in phase 1 of clinical trials and another set to join it in 2022.
How is this all possible from a company initially famous for its ancestry-focused DNA test kits?
Well, of the 11.9 million customers 23andMe genotyped through its kits, over 80% opted into its broader research programs -- allowing their DNA to enter into Genome-Wide Association Studies. Through the near-magic of biotechnology, these studies identify disease-associated genes for a wide variety of illnesses, allowing 23andMe and GlaxoSmithKline to develop unique drugs targeting these genes.
While still primarily in its infancy, this pipeline of potential drugs gives 23andMe nearly unlimited optionality in the drug-making space. However, due to the slow nature of clinical trials, that may feel like an exercise in patience for investors as they wait for incremental drug progress.
With that said, the company's recent acquisition of Lemonaid Health for $100 million in cash and $300 million in stock proves that it has more in mind than just its pipeline of drugs. Lemonaid brings a telehealth platform, giving 23andMe exposure to a promising young industry. But the acquisition also hints at a potentially brilliant move over the long term: Should 23andMe develop several drugs over time, it would be able not only to sell them but also to prescribe them through its own Lemonaid Health platform.
While realizing all of this potential may take many years, 23andMe's market capitalization of $2.9 billion could seem minuscule compared to the possibility of a handful of successful drug programs down the road.
2. Medpace
Adhering to its mission "to accelerate the global development of safe and effective medical therapeutics," Medpace Holdings (MEDP -2.35%) acts as a guide to biotechnology, pharmaceutical, and medical device companies as they go through the clinical trial process. Medpace generates most of its revenue from small and midsize biopharmaceutical companies through its end-to-end suite of services.
As a clinical contract research organization (CRO), Medpace offers full-service capabilities desirable to the small biopharma niche, acting as a one-stop-shop for clinical phase guidance. Essentially, the company has anything a drugmaker could need, from study start-up and patient recruitment and retention through clinical phase completion.
Over the company's five-year history as a publicly-traded company, its share price has jumped by over 700%. Leading this charge is Medpace's annualized sales growth rate of 22% over the last five years, and its free cash flow margin of 25% over the trailing 12 months.
In fact, as of the third quarter, the company's total backlog had grown to $1.85 billion, up 29% year over year. Compared to Medpace's market cap of just over $7 billion, this backlog adds a valuable level of security to investors considering the stock.
Overall, an investment in Medpace offers precious exposure to the small biotechnology niche -- yet has layers of safety thanks to its diversification across the hundreds of companies it serves. Moreover, as biotechnology continues to boom, so should Medpace's clinical phase guidance, making it one of my favorite picks for 2021.
3. Mesa Laboratories
Driven by its purpose to "protect the vulnerable," healthcare quality-control specialist Mesa Laboratories (MLAB -2.02%) offers investors a unique blend of diversification through its niche-focused operations. Mesa is composed of four divisions: sterilization and disinfection control, biopharmaceutical development, instruments, and continuous monitoring.
Mesa's stock is up over 10,000% since its initial public offering (IPO) in 1984. Had an investor bought $1,000 worth of Mesa shares at its IPO, they would now be worth over $100,000 for a blistering 13% compound annual growth rate over nearly 38 years. However, despite this incredible run-up in price, the company is still under the radar of most investors and only has a market cap of $1.7 billion.
Leading this charge for the company have been its 13% annualized revenue growth rate over the last decade and its 25% free cash flow margin. To generate these impressive figures, Mesa has historically been a successful serial acquirer of other smaller healthcare companies -- and it recently made its most significant move yet.
In a deal that closed in October, Mesa Laboratories acquired Agena Bioscience for $300 million, or almost one-fifth the size of its market cap. The purchase will immediately boost Mesa's revenue by nearly 50% and broaden its exposure to clinical genomics in the biotechnology industry.
Furthermore, this acquisition means that over 60% of Mesa's sales will come from consumables that require recurring purchases. Thanks to these sticky sales, Mesa's fantastic track record, and its unique mix of products, it's an excellent small-cap company to consider for long-term 10x potential.
