We're in the early days of a bear market, and that makes it hard to find stocks that'll keep plodding forward with growth even while others are sagging. Picking defensive stocks, like those involved in producing medical diagnostics, can be a good strategy when times are tough.
Diagnostics companies enjoy durable demand from healthcare systems that can't operate without them, but they also have a significant potential for upside as a result of their research and development (R&D) activity. Let's analyze two such businesses that just might be worth keeping an eye on for the next few quarters.
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1. Guardant Health
Guardant Health (GH 4.38%) is a cancer diagnostics company that's growing like wildfire while helping people to fight their diseases more effectively than they might otherwise.
With the company's tests, patients can be screened and get their cancer diagnosed and treated months earlier. Then, its diagnostics can help clinicians to choose the best treatment given the genetic particularities of the patient's tumor. Finally, they can get consistent monitoring for remission.
In sum, Guardant can make money at every link in the cancer monitoring care chain. And even if it isn't profitable yet, there's been quite a lot of interest in its products.
In the fourth quarter, it ran 25,600 tests for its clinical customers, which was 48% more than it did in 2020. As a result, its annual revenue is continuing to expand at a snappy pace, with a compound annual growth rate (CAGR) of 59% since 2018, reaching $374 million for 2021.
This year, management is anticipating revenue of up to $470 million. In the second half of 2022, it'll ask the U.S. Food and Drug Administration (FDA) to approve its newest screening test for colorectal cancer, which could mean that new revenue will start rolling in as soon as 2023.
Beyond that, expect Guardant to keep developing new diagnostic products and to keep getting regulatory approvals. Though it doesn't have any strong way to lock in its customers, it's reasonable to expect its revenue from recurring sales to keep growing if it can keep providing end-to-end coverage for every step of the diagnostic process. In short, it's more convenient for healthcare systems to buy all of the different types of tests that are needed to screen and diagnose a certain cancer from one vendor.
While it's true that eventually it'll need to deal with its unprofitability, there might be plenty of growth between now and then, and investors should add this stock to their watch list so that they can decide whether it's worth a purchase in the interim.
2. Lantheus Holdings
Much like Guardant Health, Lantheus Holdings (LNTH 1.24%) makes money by selling diagnostic products, but the difference is that it specializes in products for medical imaging. And if the stock's rise of 170% over the past 12 months is any indication of the market's sentiment about its future prospects, things are looking good for Lantheus investors.
As an example, when an oncologist needs a radioactive diagnostic agent to use for positron emission tomography (PET) in the context of making a prostate cancer diagnosis, the hospital can buy an injection called Pylarify from the company.
For other medical studies, the company actually sells hardware generators, which hospitals can use to create their own radioisotopes for imaging. And even if you're not familiar with exactly what these products are good for, I'm sure you can appreciate that hospitals need them in perpetuity if they want to be able to diagnose patients, which makes the business's base of revenue highly recurring.
Speaking of revenue, since Pylarify's launch in 2021, things have been great for Lantheus. Last year, it brought in more than $425 million in total revenue, 25.3% more than in the prior year. That's expected to increase to as much as $710 million in 2022.
Though the company isn't profitable yet, its free cash flow (FCF) for 2021 was $41.8 million, which was a whopping $37.9 million more than 2020. That'll help it to keep reducing its level of debt, which totaled $175 million in the most recent quarter.
Moving forward, Lantheus will likely keep lowering its debt load while advancing new diagnostics through its pipeline, which is rich in projects in phase 2 and phase 3 of clinical trials. Making products that are even an incremental improvement over its existing offerings will pay off over time as hospitals rely so heavily on the associated diagnostic imaging techniques that there's a big incentive to upgrade.
While I don't suggest buying it today due to its relative lack of progress toward profitability, if its net income starts to improve, it'll definitely be worth considering for a purchase.
