Centene, Neurocrine, Sarepta: Will These Out Of Favor Healthcare Stocks Outperform?

BRAZIL – 2019/08/12: In this photo illustration the Centene Corporation logo is seen displayed on a … [+]

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 +1.6% 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 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.

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Sarepta Therapeutics 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. 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]

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 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. 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 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’ current commercial drugs primarily deal with Cystic Fibrosis, 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 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 NBIX +2.6%, Ionis and Vertex VRTX -0.4%

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 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 specializes in discovering and developing RNA-targeted therapeutics. The company’s primary drug is its spinal muscular atrophy drug Spinraza which is licensed to Biogen BIIB -0.5%. 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’ current commercial drugs primarily deal with Cystic Fibrosis, 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 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 -0.8% 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 – a biotech company that develops treatments for neurological and endocrine-related diseases and disorders, Ionis Pharmaceuticals – a pharma player engaged in RNA-targeted therapeutics, BioMarin Pharmaceutical – a company focused on enzyme replacement therapies and Alkermes – which focuses on drugs for central nervous system 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 – 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 ACAD +1.1% ($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. 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.

While these healthcare names look attractive, 2020 has also created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for UnitedHealth Group vs. Ingevity shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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