As a group, growth stocks had a year to forget in 2022. And even with the market recovery we are experiencing this year, many remain in the red over the past 12 months. But there are always outliers. Some growth stocks have performed just fine recently compared to the broader market. That's true for Vertex Pharmaceuticals (VRTX -1.02%) and DexCom (DXCM 2.89%) -- and both of these companies are on solid growth paths that could continue to deliver for investors.
Let's consider why both healthcare stocks could double in the next five years -- and for those keeping score at home, that amounts to a compound annual growth rate of almost 15%.
1. Vertex Pharmaceuticals
Vertex Pharmaceuticals is a biotech company best known for its lineup of medicines that treat the underlying causes of cystic fibrosis (CF), a rare genetic disease. While the drugmaker continues to dominate this area, considering it has no competition, Vertex is looking forward to important catalysts in the near and mid-term.
First, Vertex is awaiting approval for exa-cel in the U.S. and Europe. Exa-cel is a potential gene editing therapy for sickle cell disease and beta-thalassemia the company developed with CRISPR Therapeutics. Beyond that, Vertex Pharmaceuticals has a pipeline of exciting medicines that it thinks will deliver five brand-new approvals in the next five years.
One of the company's most advanced candidates is VX-147, a potential treatment for APOL1-mediated kidney disease. This potential medicine is undergoing a phase 2/3 study. Vertex is also working on a pain treatment called VX-548 that seeks to improve over the existing standard drugs in this area, many of which come with dangerous side effects.
For instance, Acetaminophen, sold under the brand name Tylenol in the U.S., is the leading cause of acute liver failure in the country. Various opioids are also used to manage pain, but they too can have severe side effects. VX-548 is undergoing a phase 3 clinical trial. In CF, the biotech is working on medicines that could extend the pool of patients eligible for its drugs.
And Vertex is going after other difficult targets, most notably type 1 diabetes. The company's programs in this area, such as VX-880, are still in the early stages of development. But VX-880 could restore patients' ability to produce insulin, something that would make this therapy highly successful if it proves effective in studies.
Vertex Pharmaceuticals' revenue and earnings have generally grown at a good clip over the past five years.
VRTX Revenue (Quarterly) data by YCharts
Given that the company still has room to increase its sales in the CF market, and the regulatory approvals it will earn throughout the next half a decade, expect the biotech to deliver market-beating returns even beyond this period.
2. DexCom
DexCom focuses on developing continuous glucose monitoring (CGM) systems for diabetes patients. The company currently generates most of its revenue from the G6, although it has started the launch of its latest device, the G7, in the U.S. and Europe. There are at least three reasons why DexCom has been and will continue to be successful.
First, CGM systems are better than blood glucose meters, which can only measure a patient's sugar levels at a specific time using painful fingersticks. CGM systems don't rely on fingersticks, and keep track of people's blood sugar levels throughout the day. Second, DexCom has constantly developed newer and better versions of its G series CGM systems.
The latest G7 is smaller than the G6, has a faster warmup period, and blew it out of the park in clinical studies, where it delivered even better outcomes than its predecessor. Within five years, the G7 could become DexCom's primary source of revenue. Third, the worldwide diabetes market is vast. There are 422 million diabetes patients worldwide (most of whom are of the type 2 variety), and the CGM market remains underpenetrated.
This massive opportunity could allow DexCom to deliver the kinds of excellent returns it needs for its stock price to double in the next five years. As the company makes solid headway in this market, expect its financial results to continue improving.
DexCom may not see its share price soar by 566% again in the next five years as it is now a more mature company, and revenue growth has slowed.
DXCM Revenue (Quarterly) data by YCharts
But it now generates profits in addition to positive free cash flows. That and the growing top line could allow the company to double in the next half a decade.
