In general, I’m quite bullish on the healthcare sector. Many of the names in the space have extremely low valuations because a high percentage of investors irrationally believed that healthcare companies could never perform well when interest rates were high.
What’s more, a multitude of firms within the sector should be helped by lower interest rates because they will be able to borrow money more cheaply in order to fund their initiatives such as drug research. Moreover, increased utilization of artificial intelligence is making drug research cheaper and more likely to be successful.
Nevertheless, some healthcare stocks have very poor outlooks, either because their business models are broken or because their drug candidates have little or no chance of being approved by the Food & Drug Administration (FDA). And when small healthcare companies’ drug candidates fail, their stocks usually plunge tremendously. Here are three healthcare stocks to sell now.
Cassava (SAVA)
Cassava (NASDAQ:SAVA) stock soared 90% in the five days that ended on July 31. The rally was primarily based on misplaced optimism.
Based on Cassava executive chairman Richard Barry telling investors in a shareholders letter, “Our first Phase 3 trial is expected to read out by December 2024, they believed the FDA would allow its Alzheimer’s drug candidate simufilam to complete the trial. That was despite one of Cassava’s researchers being indicted for allegedly falsifying data
But I believe the FDA is unlikely to allow the trial to finish. That is because simufilam “is not well-substantiated” to treat Alzheimers, according to University of Texas at San Antonio Professor of Biology George Perry. He should know. Perry also serves as editor-in-chief of the Journal of Alzheimer’s Disease.
In a phone interview with me for InvestorPlace, Perry said only a single lab provided a majority of the data that supports the drug’s mechanism of action. City University of New York neuroscientist Hoau-Yan Wang ran the lab. The Justice Department indicted him last month for allegedly falsifying data related to simufilam.
“Now that (Wang’s) data is being questioned, Cassava’s approach is more tenuous,” said Perry. “And if there are questions about the data, it may not be appropriate to continue” the ongoing Phase 3 trial of simufilam.
Given that the Phase 3 trial was based on Wang’s data, Professor Perry said the findings should be produced by another laboratory, .
CVS Health (CVS)
In the first quarter, CVS Health’s (NYSE:CVS) operating income tumbled to $2.27 billion from $3.44 billion a year earlier. Moreover, its earnings per share sank to 88 cents from $1.65 in Q2 of 2023. Importantly, the firm also lowered the low end of its full-year operating cash flow guidance $10.5 billion from $12 billion.
The firm blamed the decline in profits on cost pressures on its Medicare insurance business. It explained the Medicare recipients it insures used more medical services than they previously did.
However, I believe CVS’s pharmacy benefits management and drug prescription businesses are being hurt by increased competition from Amazon (NASDAQ:AMZN), which has entered the drug-prescription space.
Moreover, its retail business, like that of Walgreens Boots Alliance (NASDAQ:WBA), is being undermined “by tough competition from the large retail chains such as Walmart (NYSE:WMT) and Target (NYSE:TGT).” Additionally, it faces “increased shoplifting in some areas of the U.S.”
Given CVS’s many tough challenges, I view it as one of the top healthcare stocks to sell at this point.
Teladoc Health (TDOC)
Teladoc Health’s (NYSE:TDOC) just-reported second-quarter financial results indicate the company continues to have difficulty gaining traction in the hypercompetitive telemedicine space.
Revenue fell 2% versus the same period a year earlier to $642 million. Moreover, the firm’s net cash provided by operating activities dropped to $97.6 million from $114 million in Q2 2023. Most ominously, the company’s total visits sank to 4.2 million last quarter from 4.7 million a year ago. The decline indicates tough competition in the space is taking a significant toll on Teladoc’s ability to attract patients.
Another indicator of fierce competition is Teladoc spending over $220 million on sales and advertising last quarter. That is more than one-third of its revenue.
And clearly, the Street was not pleased with the company’s results. TDOC stock sank 15% in the wake of its report. Considering Teladoc’s steep competition, it makes the telehealth company one of the healthcare stocks to sell.
On the date of publication, Larry Ramer held a short position in SAVA and a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor held a LONG position in WBA.