From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. Those leading the charge have not only realized strong financial performance but also propelled the broader industry’s returns as healthcare stocks have gained 17% over the past six months while the S&P 500 was up 8.3%.
Regardless of these results, investors must exercise caution as many businesses in this space are subject to heavy regulation that can influence their earnings potential. Taking that into account, here are three healthcare stocks that may face trouble.
Artivion (AORT)
Market Cap: $1.30 billion
Formerly known as CryoLife until its 2022 rebranding, Artivion (NYSE:AORT) develops and manufactures medical devices and preserves human tissues used in cardiac and vascular surgical procedures for patients with aortic disease.
Why Do We Think Twice About AORT?
- Revenue base of $458.7 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
Artivion is trading at $26.83 per share, or 57.5x forward P/E. Check out our free in-depth research report to learn more about why AORT doesn’t pass our bar.
NeoGenomics (NEO)
Market Cap: $1.96 billion
Operating a network of CAP-accredited and CLIA-certified laboratories across the United States and United Kingdom, NeoGenomics (NASDAQ:NEO) provides specialized cancer diagnostic testing services, including genetic analysis, molecular testing, and pathology consultation for oncologists and healthcare providers.
Why Are We Wary of NEO?
- Modest revenue base of $766.3 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Negative returns on capital show management lost money while trying to expand the business
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
NeoGenomics’s stock price of $15.50 implies a valuation ratio of 56.3x forward P/E. To fully understand why you should be careful with NEO, check out our full research report (it’s free).
Ocular Therapeutix (OCUL)
Market Cap: $1.79 billion
Pioneering a drug delivery platform that can eliminate the need for monthly eye injections, Ocular Therapeutix (NASDAQ:OCUL) develops sustained-release treatments for eye diseases using its proprietary ELUTYX bioresorbable hydrogel technology that gradually releases medication.
Why Do We Think OCUL Will Underperform?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 6.7% annually over the last two years
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 422.2 percentage points
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 325.1 percentage points
At $8.15 per share, Ocular Therapeutix trades at 34.2x forward price-to-sales. Read our free research report to see why you should think twice about including OCUL in your portfolio.
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