From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. But speed bumps such as inventory destockings have persisted in the wake of COVID-19, and over the past six months, the industry has pulled back by 12.7%. This drop was worse than the S&P 500’s 7.5% loss.

While some businesses have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three healthcare stocks that may face trouble.

Moderna (MRNA)

Market Cap: $10.26 billion

Rising to global prominence during the COVID-19 pandemic with one of the first effective vaccines, Moderna (NASDAQ:MRNA) develops messenger RNA (mRNA) medicines that direct the body's cells to produce proteins with therapeutic or preventive benefits for various diseases.

Why Is MRNA Risky?

1. Sales tumbled by 59% annually over the last two years, showing market trends are working against its favor during this cycle
2. Free cash flow margin dropped by 369.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

At $26.60 per share, Moderna trades at 4.9x forward price-to-sales. Check out our free in-depth research report to learn more about why MRNA doesn’t pass our bar.

Zimmer Biomet (ZBH)

Market Cap: $19.8 billion

With a history dating back to 1927 and a presence in over 100 countries worldwide, Zimmer Biomet (NYSE:ZBH) designs and manufactures orthopedic products including knee and hip replacements, surgical tools, and robotic technologies for joint reconstruction and spine surgeries.

Why Are We Hesitant About ZBH?

1. Flat sales over the last five years suggest it must find different ways to grow during this cycle
2. Flat earnings per share over the last five years lagged its peers
3. Underwhelming 3% return on capital reflects management’s difficulties in finding profitable growth opportunities

Zimmer Biomet is trading at $101.06 per share, or 11.6x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than ZBH.

Bio-Techne (TECH)

Market Cap: $7.93 billion

With a catalog of hundreds of thousands of specialized biological products used in laboratories worldwide, Bio-Techne (NASDAQ:TECH) develops and manufactures specialized reagents, instruments, and services that help researchers study biological processes and enable diagnostic testing and cell therapy development.

Why Does TECH Worry Us?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Modest revenue base of $1.20 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
3. Costs have risen faster than its revenue over the last two years, causing its adjusted operating margin to decline by 5.5 percentage points

Bio-Techne’s stock price of $50.50 implies a valuation ratio of 25x forward price-to-earnings. To fully understand why you should be careful with TECH, check out our full research report (it’s free).

Stocks We Like More

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