3 under-the-radar healthcare stocks I think have great growth potential

G A Chester highlights three small-cap companies for investors seeking stocks with a higher risk/higher reward profile.

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If you’re looking to add some high-return potential to your investment portfolio, I’ve got three under-the-radar healthcare stocks for you that I think could be well worth considering.

Transitioning to profitability

Horizon Discovery (LSE: HZD) is listed on London’s junior AIM market. At a share price of 173p, its market capitalisation is £260m.

It’s a global leader in the design, manufacture and application of gene editing and gene modulation technologies. Its products and services are used by researchers and drug developers, and it counts major pharmaceutical companies, including AstraZeneca, among its customers.

Horizon has been building scale and is currently loss-making. However, it’s appointed a commercially savvy chief executive to lead its transition to profitable growth. Annual results are due next Monday, and company guidance is for revenue of £58.7m, gross margin in excess of 67% (versus 62% in 2017), and year-end cash of not less than £25m.

There’ll still be a bottom-line loss at this stage, but I view a valuation of 4.4 times sales as attractive for a cashed-up company with strong growth prospects. Horizon’s management turned down a 181p a share takeover approach from Abcam last year, saying it “fundamentally undervalues” the business. I see the stock as a credible speculative buy.

Exponential revenue growth

Optibiotix (LSE: OPTI) is another AIM-listed company. At a share price of 81.5p, its market capitalisation is £70m.

It develops compounds that modify the human microbiome. These compounds help in the prevention and management of chronic lifestyle diseases, including obesity, high cholesterol and diabetes. It’s moved from research and development to inking an impressive 30-odd (and counting) commercial deals with food and pharmaceutical companies.

Ordinarily, I wouldn’t buy a stock trading at more than 10 times sales — required revenue of not less than £7m in Optibiotix’s case, versus actual revenue of just £541,000 in 2018. However, 85% of this was generated in the second half of the year, and we’re in the very early stages of its partners ramping up sales.

Due to the prospect of exponential revenue growth — much of which will drop straight to the bottom line under the company’s licensing business model — this is a rare instance where I’d be prepared to ignore my less than 10 times sales rule. As such, it’s another stock I see as a credible speculative buy.

Rising earnings

Vectura (LSE: VEC) is a constituent of the main market FTSE SmallCap index. At a share price of 72.5p, its market capitalisation is £482m.

It’s a leading designer of devices and developer of products that help patients suffering from airways diseases. It has growing global royalty streams from 20 products, and a portfolio of drugs in clinical development with multiple partners, including FTSE 100 group Hikma and Swiss giant Novartis.

Vectura posted a hefty loss on revenue of £160m last year. This was due to (non-cash) charges, including a £39.8m impairment after a disappointing result from one of its pipeline programmes. However, cash flow was strong, and even after investment of £12.3m and share buybacks of £13.8m, year-end cash increased to £108.2m from £103.7m at the start of the year.

The stock is trading at 15.4 times forecast 2019 earnings of 4.7p a share. And the multiple falls to 12.7 times next year’s forecast earnings, with City analysts having pencilled in 21% growth to 5.7p a share. The valuation looks attractive to me, and I’d be happy to buy the stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Abcam, AstraZeneca, and Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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