Where Health Meets Tech: 7 Testing and Diagnostics Stocks to Know

Medical devices and services have entered a new age; indeed, this market can be viewed as a hybrid between healthcare and technology. Here, several leading growth stock experts and contributors to MoneyShow.com highlight some favorite long-term investments involved in medical diagnostics, testing and laboratory services. David Toung, Argus Research We are launching coverage of Catalent Inc. with a buy rating. The company is a manufacturing and development partner for biotech and pharmaceutical companies, Catalent has signed 30 agreements with coronavirus vaccine and therapy developers, including Johnson & Johnson , AstraZeneca , and Arcturus Therapeutics , and believes that it has about 100 potential development and manufacturing opportunities related to Covid-19 programs. It is also growing through acquisitions. In January, it acquired a facility in Anagni, Italy, expanding its European capabilities in biologic drug production and oral solid dose manufacturing. In February, it acquired MaSTherCell Global, adding to its capabilities in the development and manufacturing of advanced biotherapeutics. Management has updated its fiscal year 2020 guidance to reflect the onboarding of new business as well as higher operating expenses related to Covid-19 preparedness. It expects any lost revenue from the pandemic to be offset by new business, and reiterated its full-year revenue forecast of $2.87 billion-$2.95 billion. Based on this guidance, we are setting adjusted EPS estimates of $1.85 for FY 20 and $2.15 for FY 21. Our five-year EPS growth rate forecast is 12%. CTLT shares were recently trading at 32x our FY 21 EPS estimate, above the average multiple of 24x for our coverage universe of life science stocks. However, we believe that the stock merits a premium valuation based on the company's large addressable market, expanding development and manufacturing capabilities, and strong long-term growth prospects. We have a target price of $100. Hilary Kramer, GameChangers CareDX is a precision medicine company that offers testing services, products and digital solutions along a patient's pre- and post-transplant journey. The company derives most of its revenues from testing services, primarily its AlloSure Kidney test, which is a donor-derived cell-free DNA solution for kidney transplant patients. In addition, AlloSure can help health care providers and their patients better manage their long-term care following a kidney transplant. AlloSure can improve patient care by helping health care providers reduce the use of invasive biopsies. Patients can get the cost for this treatment fully reimbursed through Medicare. Similarly, AlloMap Heart, a gene expression solution for heart transplant patients, is also fully reimbursable. During 2019, the company performed more than 49,000 commercial AlloSure and AlloMap tests. Its products increase the chance of a successful transplant by facilitating a better match between a solid organ or stem cell donor and a recipient. The company's long-term potential remains huge. So, while the stock is not cheap recently at over 50x 2021 EPS estimates of $0.65, the company's significant growth history and potential make it a solid choice at the present time. Richard Moroney, Dow Theory Forecasts We recently reviewed mid-cap stocks with market values below $15 billion that were also generating solid operating momentum and boasting solid financial strength. Here are two clinical-research organizations -- known as CROs -- that each earn our long term buy rating. Charles River Laboratories International is hired by biotechnology and pharmaceutical companies to test new drugs, particularly those that are in the early stages of development. Although the Covid-19 outbreak has disrupted drug trials throughout the industry, estimate-revision trends for Charles River remain favorable, with the consensus calling for growth of 2% in 2020, followed by 16% in 2021. With a market value of $8.8 billion, Charles River ranks among the largest members of the S&P Midcap 400 Index. At a recent 26x estimated estimated 2020 profits, Charles River trades at a 7% discount to the industry median. ICON is a CRO that focuses on late-stage development. The drug industry has benefited from the fading presidential prospects for progressive candidates who would likely try to curb rising drug prices. But ICON has warned of a downturn in the June and September quarters due to Covid slowing patient enrollment in drug trials and new trials being put on hold. The firm's per-share profits are projected to fall 15% in 2020 but rebound 26% in 2021. ICON shares recently traded at 27x estimated 2020 earnings, 4% below the median S&P 1500 Index life-sciences stock and 21x projected 2021 profits, a 13% discount to their industry median. Mike Cintolo, Cabot Top Ten Trader GenMark is a testing company. Its proprietary eSensor detection technology (dubbed eSensor XT-8) and ePlex systems are designed to support a broad range of molecular diagnostic tests with compact, easy-to-use workstations and self-contained, disposable test cartridges. And its ePlex offering optimizes laboratory efficiencies and addresses a broad range of infectious disease testing needs. And that's where Covid comes in. Its ePlex SARS CoV-2 Test, an in-vitro diagnostic (IVD), has been made available under an emergency access mechanism by the Secretary of Health and Human Service for Covid testing. While not yet approved by the FDA, the authorization says it is reasonable to believe that this IVD may be effective in the detection of Covid-19. Vidant Health, the largest health system in eastern North Carolina (a recent hotspot), has just signed on to use GenMark's ePlex SARS-CoV-2 test in all nine of its hospitals. This test is what has investors excited, and analysts forecast revenue growth of 43% this year (albeit with continuing red ink), though based on how demand for testing is only growing in the U.S. as states try to reopen, it's certainly possible even that growth figure could prove conservative. Genetic testing makes it easier for medical professionals to understand and diagnose diseases since a big portion of health problems have genetic origins. Invitae specializes in gathering genetic info across every stage of a person's lifespan, working to consolidate testing into a single low-cost, rapid turnaround service, and it's making good progress on that front. Its efforts have led to test costs dropping from thousands of dollars to as low as $250 today. Through its expanding genome network, the eventual aim is to increase the availability of genetic data to support healthcare decisions (one facet will be what it calls precision oncology) and the potential is huge, with the genetic testing sector expected to reach tens of billions of dollars a year for cancer alone. Archer provides labs with solutions to produce high-quality genetic data and has partnerships with 50 biopharma outfits, which together with Invitae's offerings, will provide a one-stop shop for patients and providers (baseline risk/diagnosis, therapy optimization, monitoring, etc.). While it didn't offer official guidance, the company thinks 50%-plus annual growth for the next three to five years is possible for the combined entity. Genetic testing is a big idea, and Invitae's latest move cements its position as an emerging leader in the area. Jasper Hellweg, Argus Research While the coronavirus pandemic has reduced the number of elective surgical procedures and impacted the availability of certain materials, Baxter International Inc. has partly offset this impact through its broad product portfolio. Meanwhile, companies such as Baxter with experience in diagnostic testing, vaccines, and antiviral medicines, as well as suppliers of protective equipment and other hospital products, could benefit from efforts to contain the coronavirus pandemic. We believe that Baxter's efforts to stock up on key materials, work with new suppliers, and open new production lines will help to offset the negative effects of the pandemic. The company has also continued to grow through acquisitions, partnerships, and pipeline developments. It recently received emergency use authorization from the FDA for its Oxiris filter set to treat patients with confirmed Covid-19 infections, and reported positive results in a trial of its Starling Fluid Management Monitoring System in the treatment of septic shock patients. While septic shock affects roughly 47 million people per year, resulting in at least 11 million deaths, the study is particularly timely given the risk of septic shock from Covid-19 infection. Baxter's Starling system is approved in more than 30 markets globally. Despite the uncertain of impact of Covid-19 on the company's 2020 results, we believe that Baxter's response to the pandemic and the essential nature of its business, as well as its recent dividend hike and pipeline progress warrant a buy rating. Our revised target of $97, raised from $95, implies a total potential return, including the dividend, of more than 12% from recent levels.

Where Health Meets Tech: 7 Testing and Diagnostics Stocks to Know

Experts pick their favorite long-term investments in medical diagnostics, testing and laboratory services.

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