With all the market volatility the big question on the minds of investors is whether or not right now is a buying opportunity. I won’t try to convince you one way or the other. But if you’re interested in high-growth, small-cap medical device stocks I will give you a few names that should pique your interest. You can decide for yourself if it’s worth taking a position in these stocks right now!
Small-Cap Medical Device Stock #1: Invitae (NVTA)
Invitae is a genetic information company with a $1.6 billion market cap that’s working to bring comprehensive genetic information into mainstream medical practice. The company specializes in genetic diagnostics across all stages of life, including perinatal, prenatal, pediatric and adult. Management has been working to pool genetic tests into a single service that could be offered at a lower price than current alternatives while delivering faster turnaround time.
Invitae’s growth strategy is relatively simple. By making genetic testing more accessible and affordable it expects to supply a large volume of tests. It’s also building a genome network through partnerships with industry peers and working to share genetic information on a global scale through services that inform healthcare throughout life.
It’s simple to write on paper, but harder to implement! That said, Invitae is having tremendous success. In 2016 it had only 6 million covered lives in network. That number is up to 271 million as of the end of Q1 2019. Testing volume has been rising at a quarterly rate of 47%, with 94,000 tests in Q1 2019 alone.
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Part of this is because the company’s network of biopharma partnerships is expanding (eight new partnerships in Q1 brings the total up to 40). And also because it is fulfilling its promise to lower costs. The average cost of a test in Q1 was down 19% to $226. In 2014 the cost was over $1,300!
Sales are ramping up. Invitae’s revenue was up 172% in 2017, up 117% in 2018, and up 47%, to $40.6 million, in Q1 2019. Management expects the company will deliver over 500,000 sample tests and generate over $220 million in sales (up over 50%) this year. EPS will likely be flat, then grow again by around 20% in 2020.
With such bright potential why is Invitae’s stock in the dumps? The short version is that Q1 2019 revenue missed expectations by 14%, mostly due to light testing volume, lower prices on PAMA rates for cancer testing and payer mix shift from pharma customers. Despite the light quarter management reiterated its 2019 outlook and the business appears to be healthy. The best way to play the weakness is to average into a position over time.
Small-Cap Medical Device Stock #2: ViewRay (VRAY)
ViewRay is a $794 million market cap company that makes MRI-guided radiation therapy systems that are used for imaging and treating cancer patients. Its MRIdian solution integrates MRI technology, radiation delivery and proprietary software to simultaneously image and treat cancer patients.
The technology is most interesting because, as compared to traditional radiation therapy systems known as linear accelerators (linacs), MRIdian appears better at targeting tumors while avoiding healthy tissue and can personalize treatment depending on a patient’s particular anatomy and tumor location/size.
According to Morgan Stanley the gen 2 MRIdian’s approval in the U.S., Japan and Europe means the solution is competing against an estimated 12,000 linacs and annual purchase volume of roughly 900 units. There is competition out there, mainly from Elekta, MRIdian has a high price point and adoption from its most likely customers (large academic centers and community centers) is still unknown given ViewRay is relatively early in the MRIdian launch. Point being, the stock is not without risks.
However, if you’re still reading I suspect you’re not a risk-averse investor! And at the current price/valuation one can make the case that ViewRay’s risk vs. reward profile is quite attractive.
Revenue was up 135% in 2018. Then in Q1 2019 revenue declined by 22.6% to $20 million (as compared to a strong comparable quarter), and ViewRay delivered EPS of -$0.34. The company recognized revenue from three unit sales, one system upgrade, and received orders for seven MRIdian systems.
While the quarter wasn’t a blowout by any stretch of the imagination, it suggests steady progress, both in term of sales team productivity and order flow. Analysts think sales will ramp over the next three quarters and ultimately, the company could sell around 30 units this year, driving revenue up around 46%, to $119 million.
On the other hand, ViewRay is challenged on the bottom line and is likely to lose around $1.00 per share this year. Management also filed for a $250 million mixed shelf offering a couple months ago so some dilution in the near term is possible, even though the company currently has $146 million in cash (after burning $22 million in Q1 2019).
Radiation oncology isn’t an easy business to break into so I wouldn’t go in huge with a ViewRay position. And keep in the back of your mind the potential for slow adoption of MRIdian and an eventual sale of the company, if things don’t work out. On the flip side, rapid adoption could easily mean ViewRay becomes a formidable contender in its market, and that would likely translate into a share price far above where it is now.
Small-Cap Medical Device Stock #3: AxoGen (AXGN)
AxoGen is a $905 million market cap company that makes implantable surgical products for peripheral nerve injuries. The complex structure of these implants supports nerve cell regeneration in the patient’s body. They are all off-the-shelf products, meaning they can be purchased, stored, and made available for use at a moment’s notice.
Full disclosure: This is a stock we used to hold in the Cabot Small-Cap Confidential portfolio and we did very well on it. We began reducing our exposure as the stock drifted lower, and are now totally out of it but watching for possible inclusion in the future.
Shares traded at a 52-week low near 14 back at the beginning of the year and have worked their way steadily up into the low 20s since. This isn’t a name I suggest buying aggressively now, but as with Invitae and ViewRay, Axogen requires more of an “average in” strategy. You don’t need to make any all-or-nothing decisions here; just average up or down depending on the stock’s trajectory.
The backstory is that AxoGen was a 40%-plus grower and had guided to keep that streak going in 2018 and 2019 but ran into some issues with its sales force in the middle of 2018. That led to slower-than-expected growth of just 39% in 2018.
It isn’t exactly a slow-growth story now. In fact, Q1 2019 revenue was up 35% to $23.3 million. But confidence has been dented and nefarious actors have jumped on the “down with AxoGen” bandwagon.
However, AxoGen is retooling its sales strategy and bringing in some new leadership, so a shakeup here could be good long term. And management guided for 2019 revenue of $109 million to $114 million, implying growth of over 33%, with gross margins over 80%. Earnings will still be an issue, however; Axogen is expected to deliver an EPS loss of around -$0.47 in 2019, down from a loss of -$0.34 in 2018.
This isn’t a “good to great story.” It’s more of a “disappointing to improving story.” The reality is that’s what you’re often looking for in a beaten down medical device stock as the potential of it evolving into a “good to great” story could keep shares moving higher for a long time.
The Best Small-Cap Medical Device Stocks for 2019
These three stocks are a good place to start looking for small-cap medical device stocks that could outperform for the next year. I also cover a number of high potential small-cap medical device stocks in Cabot Small-Cap Confidential, including several recommended in the first five months of 2019.
The stocks in my portfolio are my highest conviction small-cap medical device stocks for the year ahead. They play in attractive markets, including drug manufacturing equipment and supplies, and organ transplant monitoring.
If you’d like to get reports on these stocks, plus more, just grab a subscription to Cabot Small-Cap Confidential now.
Tyler Laundon is chief analyst of Cabot Small-Cap Confidential. The circulation of Small-Cap Confidential is strictly limited because the undiscovered stocks with sky-high-potential that Tyler recommends are often low-priced and thinly traded. Don’t share these recommendations!Learn More
*This post has been updated from an original version.