Investing in the healthcare space can be a volatile endeavor, especially with smaller, younger businesses. Fortunately, there are two companies that have some tailwinds to help provide stability while bringing more and more products to the market.
Moderna (MRNA 0.89%) and Fulgent Genetics (FLGT 0.48%) have seen incredible revenue due to each companies connections to the pandemic, but there's more to the story. Let's dig deeper to see why these are my favorite healthcare stocks heading into 2022.
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1. Moderna's pipeline shows the promise of its technology
It's easy to forget that before its COVID-19 vaccine, Moderna was a small company with no commercial products. In the most recent quarter, Moderna reported nearly $5 billion in revenue, a staggering 3,000% year-over-year increase. As impressive as that sounds, it was actually a deceleration. Investors should be keeping an eye on what else is in Moderna's pipeline beyond its COVID-related vaccines.
The product furthest along in the approval process is Moderna's cytomegalovirus (CMV) vaccine, which is currently in phase 3 trials. CMV is a leading cause of birth defects. According to the Centers for Disease Control, 1 in 200 babies is born with CMV, and of the affected babies, approximately 1 in 5 will have severe effects. A successful vaccine for this disease would be the next step in Moderna's business plan and could reduce its reliance on COVID-related revenues. In total, Moderna has 34 drug candidates in its pipeline, with several already in clinical trials.
Had there not been a pandemic, these products would still have been in development. Revenue from both Moderna's COVID vaccine as well as future booster shots and vaccines for younger children provide the company with the capital needed to continue to develop more vaccines and therapeutics.
2. Fulgent has a strong business growing behind its COVID results
Like Moderna, Fulgent has seen incredible revenue growth over the past two years, as it was able to quickly pivot and sell an inexpensive and accurate test for COVID-19. As demand for COVID testing spiked throughout 2020, Fulgent's revenue rose accordingly, with year-over-year revenue growth peaking in Q1 of 2020 at 4,500%. In the ensuing months, Fulgent's stock price has fluctuated with seemingly every piece of pandemic-related news, making it the epitome of a "COVID stock." However, there's much more to Fulgent beyond the headline numbers.
Fulgent's core business is its Next Generation Sequencing (NGS) genetic testing business, which offers a menu of customizable genetic tests. While the headlines have been about the decline in COVID-related revenue, the core business has grown steadily and impressively, with Q3 year-over-year revenue growth hitting 292%. Fulgent has also used the cash generated from the pandemic tailwinds to acquire two companies: Helio Health and CSI Laboratories. These acquisitions widened Fulgent's exposure in the cancer testing market and increased its footprint in China, spurring Q3 international revenue growth of 180%.
It seems that the market isn't quite sure how to price these two companies, and each trades at multiples that seem to discount their future potential. At the time of this writing, Moderna and Fulgent have price-to-earnings (P/E) ratios of 15 and 5, and price-to-sales (P/S) ratios of 9 and 3, respectively. By comparison, according to Fidelity, the P/E ratio for the sector as a whole is 45. Their attractive valuations and vast potential beyond the pandemic make these companies my top healthcare stocks of 2022.
