With the S&P 500 down over 23% year to date, investors looking for safety are eyeing the healthcare industry. Indeed, the S&P 500 Healthcare index is down just under 15% since the start of the year, outpacing the broader markets. People will need healthcare regardless of the economy, making the sector a great place to invest right now.
Our contributors identified three companies that they believe are on sale right now: Vir Biotechnologies (VIR 0.37%), OrthoPediatrics (KIDS 1.42%), and Vertex Pharmaceuticals (VRTX 1.25%).
Vir has a blockbuster in Sotrovimab
Taylor Carmichael (Vir Biotechnology): Vir Bio is down about 45% in 2022, but it is one of my highest-confidence positions in healthcare right now. When the Food and Drug Administration gave Vir -- and its partner, GlaxoSmithKline -- an Emergency Use Authorization (EUA) for its COVID-19 treatment sotrovimab (trademark Xevudy), demand for the drug skyrocketed.
Here's a back-of-the-envelope calculation for how much money this one drug has made for Vir. Xevudy is priced from $1,800 to $2,400, depending on the country. We'll assume a $2,000 price for the treatment. Vir shares this revenue with Glaxo, its marketing partner, but the biotech has a sweet partnership arrangement -- it pockets 72.5% of all Xevudy revenue.
| Timeline | Number of Doses Sold | Overall Revenue of Xevudy (Estimate) | Vir Revenue (Actual) |
|---|---|---|---|
| 2021 | 700,000 | $1.4 billion | $917 million |
| Q1 | 900,000 | $1.8 billion | $1.2 billion |
| Q2 | 100,000 | $200 million | N/A |
Data source: Vir Bio. Estimates by author.
The drug has already made $2 billion for Vir. That's a wild success story. So why is the stock down so hard in 2022?
In Q2 the FDA rescinded the EUA after the U.S. was flooded with the BA.2 subvariant of the Omicron virus. There's not enough evidence that sotrovimab works against this new strain to justify the EUA, according to the FDA.
The rest of the world disagrees. Canada, France, and Japan are all allowing access to sotrovimab, while noting that the drug is unlikely to maintain efficacy against the BA.2 subvariant. Europe has maintained authorization as well.
Vir's market cap has dropped to $3 billion. Meanwhile, the company now has $2.5 billion in cash and cash equivalents.
While we should expect Vir's revenue to drop in Q2, Europe and Japan are not exactly nothing. And in Q3 Vir and Glaxo will start testing a higher dose version of Xevudy to see if that works against the BA.2 subvariant. Any good news there and the stock will skyrocket higher.
No bones about it, this company is on the right track
Patrick Bafuma (OrthoPediatrics): In an uncertain market, I'm looking for companies that fill a niche yet have steadily grown over the years. OrthoPediatrics fits that mold. Producer of novel orthopedic surgery solutions for children, this specialized surgical hardware maker is utilized in 100% of the top children's hospitals in the U.S. Serving over 540,000 pediatric patients since its inception, with the broadest pediatric-specific portfolio in the industry, OrthoPediatrics fills a much-needed void.
With product lines for trauma, scoliosis, and specialty bracing, the company is leaning into its niche pediatric focus. And it's not like children are going to stop rough housing, playing on trampolines, or participating in sports. All of which, unfortunately, occasionally result in trips to the hospital. As such, this device maker is poised to flourish regardless of economic conditions.
Evidence of this theory can be found in the company's total revenue compound annual growth rate (CAGR) since 2016 of just over 21%. Not to mention that for the second time in a month, it increased full-year 2022 revenue guidance, most recently to $125 million-$128 million from $118 million-$121 million. This represents growth of 27% to 31% compared to 2021 -- even better than its historical CAGR.
Investors have reaped rewards too. Since this pediatric-focused company's October 2017 IPO, shares have gained more than 120% compared to just over 40% for the S&P 500 during the same time period. Not to mention OrthoPediatrics' gross profit margin for the first quarter of 2022 increased to 79.3% -- trouncing surgical supply behemoth Stryker's 64.8% for the same quarter. Despite being beaten by the index since the start of the year (down 32% vs. 23% for the S&P), I think this represents an opportune time to pick up shares in a solid company poised for years of steady growth no matter the economic climate.
A golden opportunity for patient investors
George Budwell (Vertex Pharmaceuticals): It's no secret that biotech stocks have been in meltdown mode for the better part of the past nine months. The SPDR S&P Biotech ETF, for instance, is presently down by an unsightly 46% over this time period.
What's particularly noteworthy about this unprecedented drawdown across the biotech industry is that it hasn't been confined to risky clinical-stage companies. Even the rare-disease giant Vertex Pharmaceuticals has taken a substantial hit. Speaking to this point, Vertex's stock is currently trading at a 10% discount relative to its former 52-week high. This double-digit dip in Vertex's share price, however, could represent a golden opportunity for bargain hunters.
Why is Vertex stock a strong buy in this volatile market? A few reasons. First off, Vertex has a virtual monopoly on the high-value cystic fibrosis market. The biotech was facing a potential competitive threat from an experimental therapy AbbVie in-licensed from Galapagos. But this rival treatment recently failed to meet the efficacy threshold required to advance into pivotal-stage testing. Vertex, in turn, ought to maintain a stranglehold on this multibillion dollar drug market for the foreseeable future.
Next up, Vertex has been making steady progress at expanding its portfolio beyond cystic fibrosis. Vertex's increasingly diverse pipeline features groundbreaking treatments for a host of blockbuster indications such as sickle cell disease and type 1 diabetes.
Lastly, Vertex's stock is dirt cheap at these levels. Underscoring this point, the biotech's stock is trading at under 18 times forward earnings right now, which is a downright bargain for a company with solid fundamentals, a recession-proof revenue stream, and strong growth prospects over the next decade.
