Health-care stocks have fared quite well so far this year, and analysts see plenty of upside potential for a group of small-cap sector players.
Despite last week’s headlines about the Dow Jones Industrial Average DJIA +0.08% showing a slight year-to date decline following the big drop on Thursday, the S&P 500 Index SPX +0.00% Index was up 7% for 2014.
Looking at the broader S&P 1500 Composite Index XX:SP1500 +0.02% , which was up 6% for the year through Friday, health-care stocks have gained an aggregate 13%. That’s quite a strong performance, considering the turmoil in the industry, as insurance companies and health-care providers seek to cut costs as they deal with the implications of the Affordable Care Act, also known as Obamacare.
These eight health-care stocks — mainly small-cap biotech companies that have underperformed the sector this year — have the greatest upside potential over the next 12 months, based on consensus price targets among sell-side analysts polled by FactSet:
The list includes mainly biotech and pharmaceutical companies, but there are also two equipment manufacturers.
Here’s how the analysts’ eight favorite health-care stocks have performed over recent years:
As you can see, volatility is the norm for smaller health-care stocks. This group on the whole has had a touch run so far in 2014, following solid 2013 performance for most.
Here’s a comparison of earnings and sales per share for the most recent reported quarter and year-earlier periods:
All but one of the eight companies reported increasing sales per share, but four recently reported quarterly net losses.
Here are the eight health-care companies, with additional information on their products and prospects:
Spectrum Pharmaceuticals
Spectrum Pharmaceuticals Inc. SPPI +5.48% of Henderson, Nev., develops cancer-fighting medications and hematology drugs.Spectrum Pharmaceuticals at FindTheBest
Spectrum Pharmaceuticals announced Thursday that the Food and Drug Administrationhad granted an accelerated approval for the company’s Beleodaq treatment for patients with relapsing or refractory T-cel lymphoma.
One factor holding back the stock this year has been the uncertain outcome of the company’s lawsuits against Sandoz Inc. and Innopharma Inc., after those companies applied to produce generic versions of Spectrum’s Fusilev colorectal cancer medication. The lawsuits are nothing unusual, according to RBC Capital Markets analyst Adnan Butts, who wrote in a note to clients on July 21 that the litigation “essentially validates Fusilev’s market opportunity.”
Spectrum is expected to announce its second-quarter results on Thursday, and overall sales holding steady at $40 million to $41 million per quarter with Fusilev at $20 million to $25 million per quarter “could further increase the Street’s confidence,” Butts said. He rates the stock “outperform,” with a $15 price target.
Ligand Pharmaceuticals
Ligand Pharmaceuticals Inc. LGND -0.38% of La Jolla, Calif., acquires and develops medications, often in partnership with other companies, with the goal of building a diversified portfolio of “royalty revenue generating assets.”Ligand Pharmaceuticals at FindTheBest
The company reported Monday reported an 11% year-over-year increase in second-quarter revenue to $10.6 million. Earnings declined to $1.3 million from $6.1 million, because of higher stock-based compensation to employees, a rise in business development expenses and because the prior year period included $2.4 million in income from discontinued operations.
On a non-GAAP operating basis, second-quarter earnings came in at $5.2 million, or 24 cents a share, increasing from $2.5 million, or 12 cents a share, during the second quarter of 2012.
Ligands’s stock is down 7% this year, but its return of 263% over the past three years is the second best among the eight stocks listed here.
Emergent BioSolutions
The company’s first-quarter revenue rose 25% to $53.9 million, but its net loss widened to $20.2 million from $8.1 million, with a rising cost of sales for its RSDL decontamination lotion, and other costs associated with acquisition of Cangene Corp. in February.
“Much of our thesis in EBS is based upon the potential for cost-cutting initiatives to drive meaningful operating margin expansion and EPS growth,” Cowen & Co. analyst Eric Schmidt wrote in note to clients in May. He rates the shares “outperform,” with a price target of $30.
Emergent is expected to announce its second-quarter results on Thursday, with analysts estimating EPS of 25 cents on revenue of $109.9 million.
DepoMed
DepoMed Inc. DEPO +3.12% of Newark, Calif., produces several pain management products and has completed a Phase II trial for a treatment for Parkinson’s disease.DepoMed at FindTheBest
The revenue number was also boosted by $42.8 million in non-cash royalties from products sold to PDL Biopharma Inc. PDLI -0.32% in 2013.
First-quarter product sales totaled $21.5 million, up from $9.1 million a year earlier, with major sales increases for Gralise, a treatment for pain from shingles, and Zipsor, an anti-inflamatory medication.
DepoMed will announce its second-quarter results on Wednesday, with analysts expecting a net loss of 9 cents a share, on revenue of $38 million.
Momenta Pharmaceuticals
Momenta Pharmaceuticals Inc. MNTA +0.95% of Cambridge, Mass., develops generic and “biosimilar” drugs.Momenta Pharmaceuticals at FindTheBest
The company reported a second-quarter net loss of $26.2 million, compared to $28.8 million a year earlier, even though revenue more than doubled to $11 million.
A major overhang for the stock is the company’s ongoing attempt to bring a generic version of Copaxone to the market. Copaxone is manufactured by Teva Pharmaceutical Industries TEVA -1.35% and is used to treat multiple sclerosis. Teva sued Momenta and Sandoz in 2008 after the defendants applied to produce a generic version of Copaxone.
In April, the U.S. Supreme Court granted review of a federal circuit court decision that would have allowed sales of the generic drug beginning in May. Chief Justice John Roberts refused to stay the lower court’s decision, but Momenta Pharmaceuticals still hasn’t begun selling its version of Copaxone. Teva’s appeal on the patent decision will be heard by the Supreme Court on Oct. 15.
But even if Momenta is ultimately able to begin selling generic Copaxone, the commercial opportunity could be limited, because Teva has moved over 50% of customers to a new formulation that’s taken just three times a week, according to Schmidt of Cowen & Co.
He rates Momenta “market perform” with an $11 price target.
Cynosure
Cynosure Inc. CYNO +0.04% of Westford, Mass., makes treatments for dermatology and plastic surgery.Cynosure at FindTheBest
The company’s second-quarter numbers showed plenty of improvement, with revenue rising 45% from a year earlier to $72.6 million, while gross profit rose 46% to $40.7 million. Those increases in great part reflected new products acquired when the company Palomar Medical Technology last year.
Anika Therapeutics
Anika Therapeutics Inc. ANIK +0.23% of Bedford, Mass., makes products based on hyaluronic acid for use in bone and tissue protection and healing.Anika Therapeutics at FindTheBest
“ANIK is a well-established global player in the hyaluronic acid (HA) market for treating arthritic knee pain and is the only U.S. publicly traded company 100% leveraged to it,” according to Summer Street Partners director of research Mark Landy.
In a note to clients on Friday, Landy reiterated his “buy” rating for the stock, with a $60 price target.
Looking ahead, despite numerous near-term challenges, we see ANIK well positioned to take share in a growing market undergoing a distributor shakeup,” he wrote, adding that “ANIK’s long-term upside is underappreciated.”
Symmetry Medical
Symmetry Medical Inc. SMA +1.08% of Warsaw, Ind., produces medical devices and surgical instruments.Symmetry Medical at FindTheBest
Symmetry Medical also announced it was splitting up the company. Its OEM Solutions business will be sold for $450 million in cash to Tecomet, which is a manufacturing company owned by Genstar Capital. The price will come to $7.50 a share, after fees and the elimination of outstanding debt. Symmetry Medical will also transfer ownership of its surgical instrument business to shareholders as a new company, called Symmetry Surgical.
Following the announcements, Symmetry’s Medical’s stock on Monday rose 9% to close at $9.61.
By Philip van Doorn, MarketWatch
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