Knowing these can help you avoid suboptimal investment decisions.
If you’re used to the ups and downs of the healthcare industry, there are some eerie sounds that send chills down your spine as you anticipate that your investment will soon be worthless.
So, in the spirit of Halloween, investors should keep an eye out for these three spooky signs that portend an impending decline in healthcare stocks.
1. Invested right after a windfall or event-driven growth period
Booms don’t always happen. Booms often create a hangover for shareholders, especially those who invested at the peak of the boom when companies were raking in windfall profits. As the trends that drove the good times begin to wane, the days of rapid growth become fewer and fewer, and the market tends to cut out the winners.
Take Teladoc (TDOC -0.35%) and Pfizer (PFE -0.66%) as recent examples, as shown in this chart.
SPY Total Return Level Data by YCharts.
As the pandemic disrupted people’s access to in-person medical care and created huge demand for vaccinations and telehealth services overnight, the companies created solutions to those problems and their stock prices soared. As a result of meeting demand, sales have increased significantly.
Soon after, the market became saturated and, in Pfizer’s case, actually contracted significantly. Once the peak of infection seemed to have passed, people got jabs, boosters and eventually got tired of being poked in the arm.
Similarly, Teladoc’s rapid deployment of telehealth capabilities has reached a plateau. One reason for this is that many medical issues are better addressed in an in-person visit than over the phone with your health care provider. And both companies, despite being the first major competitors to enter these markets, were forced to split their post-boom leftovers with a handful of other players.
The lesson here is not to avoid buying Teladoc or Pfizer stock. The lesson here is to focus on the long-term prospects of the companies you choose to invest in, rather than the short-term factors that individually determine their performance.
In hindsight, it’s clear that neither of these companies could have continued to grow revenues as aggressively over the long term as they did during the period when the stars briefly aligned in their favor. The next time you see a company raising cash from a one-time event or change in circumstances, use your foresight to determine whether it’s likely to regain that growth or maintain that growth. Decide if you have a real chance of doing so. Provides excellent performance over a long period of time.
2. Management’s plans keep getting pushed back.
Shareholders trust management to provide accurate estimates of when the company’s major initiatives are expected to progress and ultimately generate revenue.
Delays are common and unavoidable in the healthcare field, as businesses must navigate slow-moving organizations beyond their control, such as government agencies, insurance companies, and hospitals. Similarly, key activities such as research and development (R&D) and clinical trial recruitment often take longer than expected due to difficulty finding patients who meet eligibility criteria. Generally, if management reports delays due to these causes, there is no reason to believe that the value of the stock is at risk.
In contrast, repeated delays, even after management assures you that things are on track, are a sure sign that the stock is at high risk of falling.
Take Novavax (NVAX -1.76%)’s troubled coronavirus vaccine launch, for example. The company faced lengthy back-and-forth with regulators due to problems with its complex manufacturing process. During this time, management reassured investors that first approval of the jab, and then an increase in supply, was on the horizon. With each new report of problems, the stock price fell and the schedule was pushed back further.
By the time the company resolved the issue, competitors had been on the market for years. Shareholders and potential new buyers had less confidence in management. Therefore, be careful, if the timeline is not met repeatedly, you can find yourself in a difficult situation.
3. The company pivoted to doing just the latest and greatest… again.
It is normal for companies to want to enter hot new areas to capture growth. Especially in biopharmaceuticals, there is always a lot of basic research being carried out that can uncover opportunities that were previously thought impossible or unavailable. But if you’re a shareholder in a biopharmaceutical company that always seems to launch new pipeline programs with every new fad in drug development, there’s a good chance your stock price will fall. Here’s why:
The probability of successfully developing a new drug tends to be highest when a company conducts research and development activities within its focus area.
Indeed, there are many opportunities for focus areas to be relevant, even in seemingly disparate contexts. For example, consider the once-popular field of immuno-oncology (immune system modulating therapies for cancer treatment). A biotechnology company with the scientific leadership, scientific staff (immunologists), clinical connections, research relationships, equipment, and intellectual property (IP) to create a drug to treat allergies will create a drug to treat cancer. You can make a credible claim that you are using the same assets for the purpose. Because there is a well-established relationship between immune system dysregulation and cancer.
But if a biotech company focused on developing treatments for things like dry skin, like many other pre-profit biotechs of the same era, is experiencing completely unrelated symptoms like excessive daytime sleepiness, If you suddenly announced that you were starting a new, highly fashionable program to treat your condition, chances are very high. This is much higher than the loss suffered by shareholders. That’s doubly true if next week the company announces a new program in another unrelated field.
Drug development is extremely difficult when you have dedicated, laser-focused talent and resources. Be wary of players who make a difficult task even more complicated by targeting areas clearly outside of their core competencies.
