Many years ago, it was decided that the definition of a "small cap" should be a company with a valuation under $2 billion. These days, with some mega caps having risen past the $2 trillion mark, we probably should move that benchmark a little. In this roundtable, three Fool contributors were asked to focus on healthcare companies with market caps under $10 billion, and pick out ones that they expect can deliver $1 billion in sales in 2022.
They nominated Vir Biotechnology (VIR 2.10%), Clover Health (CLOV 1.46%), and Penumbra (PEN 0.35%) -- a trio of still relatively small companies that have huge potential upsides.
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Vir is a lock for $1 billion in sales this year
Taylor Carmichael (Vir Biotechnology): With just a $3.3 billion market cap, Vir transitioned last year from being a risky clinical-stage biotech without any drugs on the market into a world-beater than has already brought in $1 billion in sales.
The blockbuster drug that has catapulted the small company's revenue upward by 46,000% and given it a 48% profit margin is Xevudy. This is a treatment for COVID-19, and it's particularly helpful against the omicron variant.
Vir has partnered with GlaxoSmithKline (GSK 1.26%) to market and distribute Xevudy. This is similar to the deal that BioNTech (BNTX 5.71%) made with Pfizer (PFE 1.39%) in the COVID--19 vaccine arena. One downside of these sorts of collaborative agreements is that the marketing partner tends to get all the publicity. So everybody calls Comirnaty "the Pfizer vaccine" even though it was BioNTech that produced it.
So if this COVID-19 treatment becomes a huge seller, Glaxo might garner all of the kudos while Vir stays in the shadows. That's OK. Vir has a sweet deal and will collect 72.5% of all the sales from Xevudy. Management estimates Vir will receive $1.1 billion in revenues in the first six months of 2022.
Right now, though, the market is extremely bearish on coronavirus fighters like Vir. The stock is trading at a tiny multiple, and it's down significantly off its highs. But COVID-19 is not going away. And if large numbers of people continue to refuse vaccinations, there will be a greater need for COVID-19 treatments for the people who catch one of the omicron variants, and whatever variants emerge next. I suspect Vir and its big pharma partner will continue to rack up Xevudy sales in 2022. So today's share prices offer a great entry point for a biotech with an amazing future -- and not just in COVID-19, either.
A battleground health insurance stock
George Budwell (Clover Health Investments): Clover Health is a pioneer in the realm of digital health insurance. The small-cap company's core value proposition centers around its web-based technology, known as Clover Assistant, which reportedly enables users to gain patient-specific insights and real-time actionable treatment options, lowering the overall cost of care.
Clover's brain trust believes that this high-tech approach to patient care will allow the company to capture a significant share of the large -- and still growing -- Medicare beneficiary population.
So far, they appear to be right in that assessment. In 2022 alone, the company expects the number of people covered by Clover to exceed 200,000, which would represent an impressive 60% year-over-year increase. Wall Street, in turn, believes the company's annual revenue ought to jump by an astonishing 120% to $3.23 billion in 2022.
The catch is that not everyone on Wall Street is convinced that Clover's business model is sustainable over the long term. After all, there are some very real political risks associated with its direct contracting approach to growth.
Is this battleground stock worth buying? It definitely has the potential to produce market-beating returns for the remainder of the decade. On the flip side, Clover's stock will undoubtedly struggle if its web-based tech fails to gain widespread adoption over the next two to three years. As such, this small-cap healthcare stock is probably best suited for investors with a high tolerance for risk.
A leader that continues to innovate
Patrick Bafuma (Penumbra): It won't take much outperformance for medical device maker Penumbra to top $1 billion in revenue this year. Specializing in interventional therapies to treat vascular conditions such as strokes and blood clots in the lungs, the company is already guiding for revenue in the $860 million to $875 million range for 2022. And, with the exception of 2020, when the pandemic interfered, Penumbra has beaten its revenue guidance every year since its 2015 IPO. Though hitting $1 billion in 2022 revenue would require a record-breaking 15% beat, a new product line could power the company past that milestone.
While management has historically been conservative in its guidance, I think its new immersive platform could really take off. The REAL System uses a virtual reality (VR) system to engage patients in activities such as physical therapy. It has the potential to be more engaging for patients, which in turn could lead to better outcomes, and the system allows therapists to easily track patient progress. The immersive tech also generates objective data that could be used to appeal insurance denials -- something that may make its $1,300 monthly price tag more palatable.
I love how Penumbra continues to innovate stroke care by adding rehabilitation, a key aspect of stroke recovery, to its portfolio of offerings. And the company has been clear that its immersive system could be expanded for use in patients with numerous conditions requiring physical rehabilitation, not just stroke care. In fact, it believes the immersive healthcare market for physical therapy and rehab to be over 50 million patients annually in the U.S. alone. If the device maker can demonstrate the superiority of VR-guided treatment to current methods, I have little doubt that the REAL System will power Penumbra past $1 billion in revenue in 2023, and possibly as soon as this year.
Lastly, at a price-to-sales (P/S) ratio of 9.6, the $7.66 billion healthcare company is on sale compared to its peer device makers. Robotic surgery specialist Intuitive Surgical trades at a P/S ratio of 17, cardiac device maker Abiomed has a P/S ratio of 13, and clot-retriever Inari has a 14.8 P/S ratio. Penumbra has been a solid performer over the last five years, with a compound annual growth rate of 19.9% -- and its immersive system is essentially creating the VR rehabilitation market. Put it all together, and this is a stock that you can feel good about buying and holding forever.
