From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. Those leading the charge have realized strong financial performance, and over the past six months, the industry’s 3.8% return has closely followed the S&P 500.
Nevertheless, investors should tread carefully as the sector is heavily regulated, and businesses can be negatively impacted if the rules change. Keeping that in mind, here are three healthcare stocks we’re swiping left on.
BD (BDX)
Market Cap: $45.45 billion
With a history dating back to 1897 and a presence in virtually every hospital around the globe, Becton Dickinson (NYSE: BDX) develops and manufactures medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions and professionals worldwide.
Why Are We Hesitant About BDX?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 4.1% for the last five years
- Sales are projected to tank by 12% over the next 12 months as demand evaporates
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
BD is trading at $159.06 per share, or 12.7x forward P/E. To fully understand why you should be careful with BDX, check out our full research report (it’s free).
Collegium Pharmaceutical (COLL)
Market Cap: $1.11 billion
Pioneering abuse-deterrent technology in a field plagued by addiction concerns, Collegium Pharmaceutical (NASDAQ: COLL) develops and markets specialty medications for treating moderate to severe pain, including abuse-deterrent opioid formulations.
Why Does COLL Worry Us?
- Subscale operations are evident in its revenue base of $780.6 million, meaning it has fewer distribution channels than its larger rivals
- Expenses have increased as a percentage of revenue over the last two years as its adjusted operating margin fell by 4.8 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
Collegium Pharmaceutical’s stock price of $35 implies a valuation ratio of 4.8x forward P/E. Read our free research report to see why you should think twice about including COLL in your portfolio.
Jazz Pharmaceuticals (JAZZ)
Market Cap: $11.1 billion
Originally founded in 2003 and now headquartered in Ireland following a 2012 tax inversion merger, Jazz Pharmaceuticals (NASDAQGS:JAZZ) develops and markets medicines for sleep disorders, epilepsy, and cancer, with a focus on treatments for patients with limited therapeutic options.
Why Does JAZZ Give Us Pause?
- 5.5% annual revenue growth over the last two years was slower than its healthcare peers
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 26.8 percentage points
- Issuance of new shares over the last five years caused its earnings per share to fall by 8% annually while its revenue grew
At $180.04 per share, Jazz Pharmaceuticals trades at 7.8x forward P/E. Dive into our free research report to see why there are better opportunities than JAZZ.
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