Two top picks in health tech from iA Capital Markets

Nearly two years in, the COVID-19 pandemic continues to affect numerous businesses and organizations, particularly with the emergence of the Delta and Omicron variants.

For some investment portfolios, however, healthcare stocks can provide a lifeline, with iA Capital Markets analyst Chelsea Stellick singling out CareRx Corporation (CareRx Corporation Stock Quote, Chart, News, Analysts, Financials TSX:CRRX) and Quipt Home Medical Corp (Quipt Home Medical Stock Quote, Charts, News, Analysts, Financials TSXV:QIPT) as Top Picks in an Equity Research note to clients on Monday.

“We see 2022 as a year of consolidation, as better-capitalized and more resilient businesses are able to overcome ongoing supply chain difficulties against the challenging backdrop of gradually receding fiscal and monetary stimulus,” Stellick said.

Stellick said where some healthcare options like HLS Therapeutics (HLS Therapeutics Stock Quote, Chart, News, Analysts, Financials TSX:HLS) had difficulty on account of an inability to market to prescribers, others like Microbix Biosystems (Microbix Biosystems Stock Quote, Chart, News, Analysts, Financials TSX:MBX) got a boost as they sell COVID-19 testing products.

CareRx, in particular, turned in a strong performance in 2021, yielding a return of 48.2 per cent for the calendar year. And Stellick is calling for more upside, providing a “Buy” rating while forecasting a near doubling for 2022 (89.6 per cent) at a target price of $9.50/share. 

Stellick said CareRx was able to double its run rate from the end of the 2020 fiscal year on account of being aggressive on the acquisition front, particularly with long-term care and retirement home pharmacies as the general population continues to age. The company also has a stated goal of increasing its annual run rate revenue to $500 million from its present $370 million position, with Stellick conservatively estimating the company’s adjusted EBITDA margin at around 12 per cent.

Stellick notes that CareRx’s position should only improve toward the end of 2022 as it has convertible debentures that will convert this year, leading to a refinancing on the company’s debt.

CareRx has also gobbled up its competition, acquiring three of its four primary competitors to build up to 23 per cent market share, with Stellick also noting the potential for the company to leverage its numerous technology partnerships, as well as its subsidiary that provides delivery service.

“This kind of ‘other bets’ portfolio benefits its brand value and provides moonshot opportunities to reinvest cash flow into,” Stellick said.

While CareRx made a number of moves in 2021, Stellick believes Quipt has been preparing to follow a similar path, with her target price of $13.50/share (“Buy” rating, potential 81 per cent year-over-year increase) attributed to tailwinds related to long COVID and ageing demographics, building off the 2021 fiscal year that yielded share appreciation of 10 per cent.

Quipt, which dual listed to the NASDAQ last year to complement its TSX Venture listing, completed a steady stream of small acquisitions in 2021, though background preparations for rapid expansion are fully underway. Management has guided for a 2022 run rate revenue between $180 million and $190 million (all Quipt reporting is in US dollars), accompanied by an adjusted EBITDA range between $38 million and $43 million on the way to stated targets of $250 million in run rate revenue with approximately $63 million in adjusted EBITDA.

Stellick believes Quipt’s recent tuck-in acquisitions and potential acquisitions under non-binding LOIs put the company, which now serves over 150,000 patients in 62 locations across 15 US states, in a good position to improve on its run rate revenue of $110 million with a 20 per cent adjusted EBITDA margin as of year-end.

“The regulatory environment is increasingly favourable,” Stellick said. “Recent delays to Medicare cuts are representative of the Biden administration’s desire to maintain and improve healthcare coverage.”

On top of her views on CareRx and Quipt, Stellick believes 2022 will bring healthcare and biotechnology stocks into a bigger spotlight, with expected catalysts coming in the form of clinical trial data from IMV Inc  (IMV Stock Quote, Chart, News, Analysts, Financials TSX:IMV), NervGen Pharma  (NervGen Pharma Stock Quote, Chart, News TSXV:NGEN) and Alpha Cognition (Alpha Cognition Stock Quote, Chart, News, Analysts, Financials TSXV:ACOG).

Stellick is also focused on consolidation in her coverage, as she believes the iA Capital Market picks are in prime position to expand market share organically and through mergers and acquisitions, with a particular eye on CareRx, Quipt, Neighbourly Pharmacies (Neighbourly Pharmacy Stock Quote, Chart, News, Analysts, Financials TSX:NBLY), Medical Facilities Corporation (Medical Facilities Corporation Stock Quote, Chart, News TSX:DR), and Hamilton Thorne (Hamilton Thorne Stock Quote, Chart, News: TSXV:HTL).

Overall, Stellick believes 2022 could be a pivotal year for any investors looking to enter or expand their healthcare portfolios as the industry returns to pre-pandemic levels.

“We believe vaccines and treatments will turn COVID-19 into an increasingly manageable endemic disease in developed markets toward the middle of 2022 – assuming no dominant variant brings higher rates of severe outcomes,” Stellick said. “The companies that made the most of the last two years for R&D or market share expansion will be the winners as healthcare continues to increase its portion of GDP for the foreseeable future.”