Technology stocks are staples in growth portfolios because of their eye-popping revenue growth, but technology isn’t the only sector of the stock market that boasts fast-growing companies. For example, many healthcare stocks are growing at rates that Silicon Valley would envy. In fact, Foundation Medicine (NASDAQ: FMI), Exelixis Corp (NASDAQ: EXEL), and Teladoc (NYSE: TDOC) all reported year-over-year sales growth north of 100% in first-quarter 2018.
Are these stocks worth including in your portfolio?
1. Precision cancer treatment
Our understanding of the human genome and the role genes play in cancer is increasingly shaping patient treatment and one company that’s at the forefront of this movement is Foundation Medicine.
Using next-generation screening technology, Foundation Medicine helps drugmakers identify for clinical drug trials patients who have genetic mutations that make them most amenable. Also, following the Food and Drug Administration approval of FoundationOne CDx late last year, Foundation Medicine became the first company to offer a comprehensive gene testing solution that matches solid-tumor cancer patients up with cancer drugs that are most likely to help them.
Thanks to a flurry of biopharma cancer gene therapy research and rising demand for clinical testing, Foundation Medicine’s first-quarter 2018 sales skyrocketed 101% year over year to $52.8 million. Contributing to the growth was a 57% year-over-year increase in completed tests to 21,861.
I expect testing volume to climb much higher, though. In Q1, Medicare granted FoundationOne CDx broad coverage through a final national coverage determination that makes it available for eligible stage 3 and stage 4 solid-tumor cancer patients. Private insurers usually follow Medicare’s lead, so I suspect FoundationOne CDx will win widespread reimbursement soon. If so, then FoundationOne CDx could become widely used to create cancer treatment plans for advanced cancer patients, an addressable market that Foundation Medicine estimates at over 1 million people in the U.S. alone.
Foundation Medicine isn’t turning a profit yet, but I expect that will happen soon enough. The sheer size of the addressable market and the importance of advancing cancer treatment could easily make genetic testing a necessity. According to the National Cancer Institute, about 1.7 million people will be newly diagnosed with cancer this year and over 600,000 Americans will pass away this year because of cancer.
Foundation Medicine estimates it will do between 90,000 to 100,000 clinical tests and sales will clock in at up to $220 million this year. That won’t fully offset the $250 million to $260 million it expects to spend, but it could put Foundation Medicine in a position to turn a profit as soon 2019.
2. Improving kidney cancer treatment
Pfizer’s (NYSE: PFE) Sutent has long been the go-to cancer drug used to treat first-line kidney patients. However, Sutent’s use in these patients may decline rapidly following the approval of Exelixis’ Cabometyx in that setting in December.
Cabometyx has been on the market as a second-line therapy since 2016, and since its approval, it’s steadily displaced the use of Afinitor, a drug that was generating $1.6 billion in annual sales prior to Cabometyx getting a green light. Given that Cabometyx first-line approval was based on its outperforming Sutent in trials, I expect it will have similar success in winning market share in the first-line indication.
So far, it appears to be off to a good start. Exelixis’ companywide revenue soared to $212.3 million in Q1, up 163% from one year ago, largely because Cabometyx’s revenue improved by 43% quarter over quarter to $129 million. According to management, Cabometyx’s market share among tyrosine kinase inhibitors (a commonly used class of drugs in kidney cancer) improved to 25% from 21% between Q4 and Q1 in 2018.
Cabometyx sales could climb significantly from here as doctors increasingly use it instead of Sutent in kidney cancer, but that’s not the only reason Exelixis revenue could continue higher. Management recently filed for Cabometyx’s approval in second-line liver cancer and a decision in that indication is anticipated later this year. If it gets the go-ahead, that could increase revenue by an additional nine figures.
The company reported first-quarter earnings per share of $0.37, and since sales are likely to continue growing, industry watchers think Exelixis’ EPS could grow to $1.28 next year. If they’re right, then buying Exelixis when its forward P/E ratio is just 14.9 could prove to be profit-friendly.
3. Dialing up profits
In the future, patients may receive a lot of their primary care via virtual doctor visits facilitated by Teladoc.
In partnership with providers and insurers, patients can use Teladoc’s service to discuss their healthcare concerns with doctors on smartphones or computers. The on-demand nature of virtual visits makes it a great option for time-strapped patients and virtual visits are a win for providers because they’re a good way to fill empty slots in their schedule.
Virtual doctor visits are arguably most appropriate for simple healthcare needs now, but in the future, advances in remote patient monitoring could make them useful in complex healthcare cases, as well. In anticipation of this shift, Teladoc acquired Best Doctors last year.
Best Doctors provides virtual second opinions from top-rated specialists and this acquisition was a big reason why Teladoc’s first-quarter revenue grew 109% year over year to $89.6 million. Best Doctors was an important source of revenue in Q1, but even if you back out its contribution, Teladoc’s sales still grew by 47% in the past year.
Teladoc sees a net loss of between $1.36 to $1.41 this year, but sales are expected to increase to between $350 million to $360 million from $233.3 million in 2017. The losses will likely continue for a while, but the size of the addressable market still makes this a stock worth buying. In Q1, Teladoc had 606,000 doctor visits and that’s only a small fraction of the 991 million times patients visited doctors last year, according to the Centers for Disease Control.
Overall, fast-growing companies tend to be more volatile than slower-growing peers, but over time, investing in high-growth companies like these three can pay off with market-beating returns. Therefore, if you have a long-term time horizon and you’re willing to accept the risk associated with investing in growth stocks, it might be worth buying all three of these for your portfolio.
