These Healthcare Stocks Lagged This Year, But Might Offer Deep Value

Our theme of Out Of Favor Health Care Stocks includes healthcare and pharmaceutical stocks that are seeing a disconnect between their financial performance and recent stock price returns. The theme remains down by about 38% year-to-date, compared to the S&P 500 which is up by a solid 23% over the same period. So are these stocks worth investing in at current levels? Now, some of the stocks in our theme have seen setbacks to their development pipelines, while others have faced some disruption due to the impact of Covid-19. However, we think the risk-reward positioning should be favorable given the extent of the correction in most of the stocks and their strong historical revenue growth rates. Moreover, with the Fed set to hike interest rates in 2022, there is a possibility that investors could continue to rotate out of richly valued stocks to value picks and beaten-down names and this could also help the stocks in our theme.

Within our theme, Vertex Pharmaceuticals stock (NASDAQ:VRTX) has been one of the better performers, declining by about 12% year-to-date. The decline was driven partly by the company’s move to abandon further development of VX-864 for alpha-1 antitrypsin deficiency (AATD) following phase 2 trials, as it noted that the drug was unlikely to provide substantial clinical benefit. On the other side, ACADIA Pharmaceuticals stock (ACAD), down by 57% year-to-date, has been the weakest performer. This was largely due to the company’s flagship drug Nuplazid, which is currently used to treat hallucinations associated with Parkinson’s disease psychosis (PDP), seeing a regulatory setback on a proposed label expansion as a treatment for dementia-related psychosis, earlier this year.

Below you’ll find our previous coverage of the healthcare theme where you can track our view over time.

[6/30/2021] Is There Deep Value In These Beaten Down Healthcare Stocks?

Our theme of Out Of Favor Health Care Stocks includes healthcare and pharma names that are seeing a disconnect between their financial performance and stock price returns. Specifically, the theme filters for healthcare companies that have grown revenue by at least 50% over the last three years, with operating margins also expanding, and despite this, have seen their stocks return less than 10% since early 2020. Overall, the theme remains down by about 29% year-to-date, compared to the S&P 500 which is up by about 15%. However, with coronavirus cases in the U.S. on the decline and healthcare spending on areas outside of Covid likely to pick up, the stocks in our theme could see some upside. Moreover, the broader market rotation from richly valued stocks to value picks could also help the stocks in our theme. Below is a bit more about how some of the stocks in our theme have been faring.

Sarepta Therapeutics (SRPT), a company that develops RNA-targeted therapeutics and gene therapy for the treatment of rare diseases, has seen its stock decline by 54% year-to-date. The decline is due to unfavorable outcomes from clinical trials for one of its drugs, SRP-9001, used for treating Duchenne muscular dystrophy (DMD). However, the sell-off appears overdone, as there have been some positive developments for the stock, including the approval of Amondys 45, a drug used to treat certain patients with DMD. The company also has multiple other drugs in development that will likely help it gain share in the DMD treatment space over the coming years.

Vertex Pharmaceuticals (VRTX) stock is down by about 17% year-to-date, driven partly by the company’s move to abandon further development of VX-864 for alpha-1 antitrypsin deficiency (AATD) following phase 2 trials, as it noted that the drug was unlikely to provide substantial clinical benefit. However, the company’s most important drug, a 3-in-1 pill called ‘Trikafta,” which is used for the treatment of  Cystic Fibrosis, has been seeing traction, generating about $3.9 billion in its first full year of sales in 2020. The stock could benefit as sales scale up further.

Neurocrine Biosciences (NBIX) is a biopharma company that develops treatments for neurological and endocrine-related disease disorders. The stock has remained roughly flat this year, as the phase two study of Luvadaxistat failed to achieve its primary endpoint of easing the negative symptoms of schizophrenia. Moreover, the company’s first FDA-approved drug Ingrezza, a treatment for Tardive Dyskinesia, faced headwinds due to the Covid pandemic, which impacted new patient starts. That said, with Covid cases off their highs and over half of U.S adults vaccinated, Ingrezza could see sales improve. Peak sales are estimated to be over $2 billion, compared to sales of $993 million in 2020.

[5/27/2021] Are These Healthcare Stocks Worth A Look?

Our theme of Out Of Favor Health Care Stocks includes healthcare and pharma stocks that have done reasonably well financially in recent years, although their stock prices have declined or underperformed due to setbacks in their development pipelines or due to Covid-19 related disruptions in the healthcare industry. The theme is down by about -33% year to date, compared to the S&P 500 which is up by about 12% over the same period. Below is a bit more about some of the companies in our theme, the reasons for their underperformance, and why we think they could be poised to recover.

ACADIA Pharmaceuticals (ACAD) a biopharmaceutical company focused on neuroscience drugs, has been the worst performer within our theme, with its stock down by 59% year-to-date. The underperformance comes as the company’s flagship drug Nuplazid, which is currently used to treat hallucinations associated with Parkinson’s disease psychosis (PDP), saw a regulatory setback on a proposed label expansion as a treatment for dementia-related psychosis in March.  The company could still see an upside as Nuplazid continues to see strong demand from PDP treatment. Moreover, ACADIA says it will work with the FDA to resolve discrepancies in its application for dementia-related psychosis treatment.

Emergent Biosolutions (EBS), a specialty biopharmaceutical company, has seen its stock decline by about 36% this year. The sell-off comes as the company revealed that a “human error” in its Baltimore plant resulted in the contamination of a batch of Johnson & Johnson’s (NYSE: JNJ) Covid-19 vaccines, which it was helping to produce. The FDA asked the company to pause production and inspected the facility, making nine observations primarily on quality issues. That said, the worst is likely behind EBS stock now with the company recently noting that it was rectifying the issues, with production likely to resume “within days.” Considering the current pandemic and the shortage of vaccines globally, it’s likely that demand for the company’s services will hold up. Consensus estimates point to revenue growth of about 16% for this year.

Vertex Pharmaceuticals (VRTX) stock is down by about 12 % year-to-date, on account of mixed quarterly results and the company’s move to discontinue VX-814, a drug that was being investigated for a potential treatment for alpha-1 antitrypsin deficiency (AATD), last year. However, the company’s most important drug, a 3-in-1 pill called ‘Trikafta,” which is used for the treatment of  Cystic Fibrosis, has been seeing traction, generating about $3.9 billion in its first full year of sales in 2020, and Vertex stock could benefit as sales scale up further.

[4/14/2021] Out Of Favor Healthcare Stocks To Watch

Our theme of Out Of Favor Health Care Stocks includes healthcare and pharma names that have done reasonably well financially in recent years, although their stock prices have declined or underperformed, on account of Covid-19 related disruptions in the healthcare industry, or due to setbacks in their development pipelines. The theme is down by about -26% year to date, compared to the S&P 500 which is up by about 10% over the same period. Below is a bit more about how some of the stocks in our theme have been faring.

Vertex Pharmaceuticals (VRTX) stock is down by about 3% year-to-date, on account of mixed results over Q4 and the company’s move to discontinue VX-814, a drug that was being investigated for a potential treatment for alpha-1 antitrypsin deficiency (AATD), last year. However, the company’s most important drug, a 3-in-1 pill called ‘Trikafta,” which is used for the treatment of  Cystic Fibrosis, has been seeing traction, generating about $3.9 billion in its first full year of sales in 2020. The stock could benefit as sales scale up further.

Neurocrine Biosciences (NBIX) is a biopharma company that develops treatments for neurological and endocrine-related disease disorders. The stock has seen some headwinds, declining by about 14% year to date, as the phase two study of Luvadaxistat failed to achieve its primary endpoint of easing the negative symptoms of schizophrenia. Moreover, the company’s first FDA-approved drug Ingrezza, a treatment for Tardive Dyskinesia, faced headwinds due to the Covid pandemic, which impacted new patient starts. That said, with Covid cases off their highs and vaccinations picking up, Ingrezza could see sales improve. Peak sales are estimated to be over $2 billion, compared to sales of $993 million in 2020.

Centene (CNC) is a full-line managed services company that services both government-sponsored and private insurance health care programs. The stock has remained almost flat year-to-date, due to mixed quarterly earnings and some headwinds due to Covid-19. However,  the stock could see gains in the medium term. Insurance companies specializing in government-sponsored Medicaid health programs could benefit, as President Joe Biden supports the Obamacare plan and potential reforms by Democrats in the healthcare sector could bode well for Centene.

[3/16/2021] Out Of Favor Health Care Stocks

Out Of Favor Health Care Stocks includes healthcare and pharma names that have done reasonably well financially in recent years, although their stock prices have lagged, due to Covid-19 related disruptions in the healthcare industry or due to some setbacks in their development pipelines. That said, the broader markets have seen significant sector rotation in recent weeks, with investors reallocating funds from expensive, high-growth tech stocks to value stocks and companies that could benefit as the Covid-19 pandemic wanes. It’s likely that some of the names in our theme could benefit from this trend as well. Here is a bit more about some of these companies have how they have been faring this year.

Centene (CNC) is a managed healthcare plan provider and is the largest Medicaid Managed Care Organization. The stock is down by about -2% year-to-date, due to mixed quarterly earnings and some headwinds due to Covid-19. However, with Covid-19 infections on the decline in the U.S. in recent weeks, and with Democrats achieving a U.S. government trifecta, the stock could see gains in the medium term.

Neurocrine Biosciences (NBIX) is a biopharma company that develops treatments for neurological and endocrine-related disease disorders. The company’s first FDA-approved drug Ingrezza, a treatment for Tardive Dyskinesia, is facing headwinds due to the Covid pandemic, which is impacting new patient starts. The stock is down by about -16% year-to-date.

Sarepta Therapeutics (SRPT) stock has declined by over 35% since early January due to unfavorable outcomes from clinical trials for one of its drugs, SRP-9001, used for treating Duchenne muscular dystrophy (DMD). However, the sell-off appears overdone, as there have been some positive developments for the stock, including the approval of Amondys 45, a drug used to treat certain patients with DMD.

See our theme Out Of Favor Health Care Stocks for a detailed look at the complete set of companies in the theme and our detailed selection criteria.

[2/22/2021] Sarepta, Neurocrine and Vertex  

Our theme of Out Of Favor Health Care Stocks includes companies that have robust revenue growth and improving margins, and yet have not rallied much over the last year or so, due to Covid-19 related disruptions in the healthcare industry or due to some setbacks in their development pipelines. Below is a bit more about these stocks and why we think they could be good picks at current levels. See our theme Out Of Favor Health Care Stocks for a detailed look at the complete set of companies in the theme and our detailed selection criteria.

Sarepta Therapeutics stock (SRPT) has declined by over 50% since early January due to unfavorable outcomes from clinical trials for one of its drugs, SRP-9001, used for treating Duchenne muscular dystrophy (DMD). However, the stock looks attractive at current levels, considering that the company already had a couple of products that are already generating meaningful revenue, including Vyondys 53 and Exondys 51 which are both approved to treat DMD. Peak sales for Exondys 51’s are estimated to be upwards of $1 billion, compared to sales of $381 million in 2019, while Vyondys 53 can garner $250 million in peak sales. The company also reported a solid 41% sales growth in the first nine months of 2020. (Related: After A 50% Fall Sarepta Therapeutics Stock Now Looks Attractive)

Neurocrine Biosciences (NBIX) is a biopharma company that develops treatments for neurological and endocrine-related disease disorders. The company’s first FDA-approved drug Ingrezza, a treatment for Tardive Dyskinesia, is facing headwinds due to the Covid pandemic, which is impacting new patient starts. Although sales could remain lackluster for a few quarters, they should see gains in the medium to long run as Covid-19 cases moderate, with vaccine dosing in the U.S. rising.  In fact, Ingrezza’s peak sales are estimated to be over $2 billion, compared to the sales of $753 million seen in 2019.

Vertex Pharmaceuticals’ (VRTX) current commercial drugs primarily deal with Cystic Fibrosis (CF), a genetic disease that affects the lungs and digestive system. The company’s most important drug, a 3-in-1 pill called ‘Trikafta,” was approved by the US FDA in late 2019 and generated about $3.9 billion in its first full year of sales in 2020. That said, the stock has underperformed as the biotech company discontinued the development of a drug for alpha-1 antitrypsin deficiency (AATD) last October. However, the company is developing another drug for the same disorder, with clinical data expected for the first half of 2021. Moreover, the company is likely to continue benefiting from a continued expansion of Trikafta sales.

Our first set of Out Of Favor Health Care picks, published on July 24, 2020 (see below), outperformed significantly, rising by over 55% on an equally weighted basis since our recommendation. In comparison, the S&P 500 is up by just about 20% over the same period. Stocks we picked back then include Novocure (NASDAQ: NVCR), ACADIA (NASDAQ: ACAD), Alexion (NASDAQ: ALXN), and Alkermes (NASDAQ: ALKS).

[1/15/2021] Neurocrine, Ionis and Vertex

Our theme of Out Of Favor Health Care Stocks includes health care stocks that have witnessed strong Revenue growth and improving fundamentals over the last few years but have underperformed in 2020, on account of clinical setbacks or due to Covid-19 related disruptions of the health care industry. Below is a bit more about these stocks, the reasons for their recent underperformance, and some near-term trends that could help with their recovery.

Neurocrine Biosciences (NBIX) is a biopharma company that develops treatments for neurological and endocrine-related disease disorders. The company’s first FDA-approved drug Ingrezza, a treatment for Tardive Dyskinesia, is facing headwinds due to the Covid pandemic, which is impacting new patient starts. Although sales could remain lackluster for a few quarters, it should see gains in the medium to long run. In fact, Ingrezza’s peak sales are estimated to be over $2 billion, compared to the sales of $753 million seen in 2019.

Ionis Pharmaceuticals (IONS) specializes in discovering and developing RNA-targeted therapeutics. The company’s primary drug is its spinal muscular atrophy (SMA) drug Spinraza which is licensed to Biogen. The stock has underperformed partly due to weak sales of Spinraza, with royalty Revenue for the drug declining in Q3 2020 due to the impact of Covid-19 on both new starts and maintenance doses, as well as increased competition. That said, Ionis is likely to return to growth over 2021, helping the stock.

Vertex Pharmaceuticals’ (VRTX) current commercial drugs primarily deal with Cystic Fibrosis (CF), a genetic disease that affects the lungs and digestive system. The company’s most important drug, a 3-in-1 pill called ‘Trikafta,” was approved by the US FDA in late 2019 and is likely to be a big driver of sales. That said, the stock underperformed as the biotech discontinued the development of a drug for alpha-1 antitrypsin deficiency (AATD) last October. However, the company is developing another drug for the same disorder, with clinical data expected for the first half of 2021.

BioMarin Pharmaceutical (BMRN) focused on enzyme replacement therapies. The stock underperformed with the U.S. FDA not approving its promising candidate valoctocogene roxaparvovec gene therapy for severe hemophilia A, which is in the late-stage pipeline, as it requested for two-year follow-up safety and efficacy data on all trial participants for Valrox. This means that the drug could probably be delayed to 2022. Valrox is a potential blockbuster with peak sales estimated to be over $3.5 billion in 2030. That said, the company still has six other approved drugs, and sales are poised to grow modestly over 2020 and 2021.

[12/31/2020] BioMarin, Alkermes, Ionis: Are These Health Care Stocks Set To Outperform In 2021

Our theme of Out Of Favor Health Care Stocks includes health care names that have witnessed strong growth and improving fundamentals over the last few years but have still underperformed over 2020, partly due to Covid-19 related disruptions of the health care industry. However, with highly effective Covid vaccines being rolled out, the broader healthcare sector and economy should start returning to normal, potentially setting these stocks up for outperformance. Companies in our theme include Neurocrine Biosciences (NASDAQ:NBIX) – a biotech company that develops treatments for neurological and endocrine-related diseases and disorders, Ionis Pharmaceuticals (NASDAQ:IONS) – a pharma player engaged in RNA-targeted therapeutics, BioMarin Pharmaceutical (NASDAQ:BMRN) – a company focused on enzyme replacement therapies and Alkermes (NASDAQ:ALKS) – which focuses on drugs for central nervous system (CNS) diseases. View our theme on Out Of Favor Health Care Stocks for more details on the selection criteria and performance of these companies in recent years.

Our first set of out of favor health care stock picks, published on July 24, 2020 (see below), has outperformed significantly, rising by about 60% on an equally weighted basis since our recommendation. In comparison, the S&P 500 is up by just about 16% over the same period. The stocks we picked back then include Novocure (NASDAQ: NVCR), ACADIA (NASDAQ: ACAD), Alexion (NASDAQ: ALXN), and Alkermes (NASDAQ: ALKS).

[Updated 7/24/2020] Out Of Favor Healthcare Stocks

The performance of the healthcare sector has been mixed this year. While dental and surgery-related stocks have declined – as Covid-19 impacts sectors that require a close person-to-person contact, companies working on Covid-19 vaccines have outperformed significantly. On the other hand, the stocks of several high-growth companies that sell therapeutics that are relatively insulated from the pandemic have remained listless. In this analysis, we’ve picked a few healthcare names including Novocure (NASDAQ: NVCR), ACADIA (NASDAQ: ACAD), and Alexion (NASDAQ: ALXN) that have witnessed strong growth and improving fundamentals over the last few years but have still underperformed this year. Overall, we believe these stocks could offer some growth and stability in the current environment, without being overpriced. See our analysis Out Of Favor Health Care Stocks That Are Still Poised For Gains for more details on the returns and performance of these stocks. Parts of the analysis are summarized below.

Alexion ($23 billion, -3% YTD) is a pharma company best known for Soliris, a drug used to treat atypical hemolytic uremic syndrome and paroxysmal nocturnal hemoglobinuria (PNH) – two rare disorders. The company has seen demand for Soliris grow, with revenues almost doubling from $2.6 billion in 2015 to $5 billion in 2019. Alexion’s pipeline also looks strong, with multiple drugs in phase 3 clinical trials including Ultomiris, which is its next-generation drug for PNH.

ACADIA Pharmaceuticals ($7 billion, +2% YTD) a biopharmaceutical company known for its flagship drug Nuplazid, which helps to treat the hallucinations associated with Parkinson’s disease psychosis (PDP). However, the stock gave up much of its year-to-date gains after Nuplazid recently failed in a trial for depression treatment. The company could still see an upside as Nuplazid continues to see strong demand from the PDP treatment, with total revenue rising steadily from about $17 million in 2016 to about $340 million last year.

Novocure ($7 billion, -20% YTD) is an oncology company that offers a novel therapy called Tumor Treating Fields, which uses electric fields to disrupt solid tumor cancer cell division. The company’s revenues have grown from around $33 million in 2015 to $350 million in 2019. While the TTF device is currently used for some types of brain cancer, late-stage trials are underway for its use in other conditions including lung carcinoma, ovarian cancer, and pancreatic cancer and this could drive future growth.

Alkermes ($3 billion, -4% YTD) is a biopharmaceutical company that focuses on drugs for diseases in the central nervous system including schizophrenia, depression, and multiple sclerosis. The company has been seeing steady demand growth, with revenue growing from around $0.6 billion in 2015 to about $1.2 billion in 2019.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 12/16/2021
[2] Cumulative total returns since 2017