3 Under-the-Radar Stocks in the Healthcare Sector

MarketsMotley Fool

While large-cap stocks tend to grab more of the headlines, there's a whole universe of small-cap companies out there to consider as well. But which of those lesser-known companies are most deserving of a closer look for your portfolio?

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To help answer that question -- and to narrow it down a bit -- we asked a trio of Foolish healthcare investors for small-cap picks in that sector that they think aren't getting the attention or appreciation they deserve. In response, they offered up Syndax Pharmaceuticals (NASDAQ: SNDX)Corcept Therapeutics (NASDAQ: CORT), and LeMaitre Vascular (NASDAQ: LMAT)

The next step in cancer immunotherapy

George Budwell

That's where a company like Syndax Pharmaceuticals and its oral, small-molecule product candidate entinostat could make a big splash. The treatment is part of the third wave of immuno-oncology drugs (behind checkpoint inhibitors and cell-based therapies). Entinostat's job, if you will, is to block the action of immune suppressor cells -- known as myeloid-derived suppressor cells -- as well as regulatory T cells, when used in combination with a checkpoint inhibitor. If it succeeds, it will act synergistically with checkpoint inhibitor antibodies to produce a more robust immune response.

At present, Syndax is evaluating entinostat in several clinical trials for breast cancer, non-small-cell lung cancer, advanced melanoma, and ovarian cancer. While it's arguably unreasonable to assume that the drug will prove useful in the majority of these indications (based on the poor track record of experimental cancer therapies in general), it shouldn't need to hit on more than one of these conditions to become a major value driver for a company with a market cap of only $304 million. And if a positive readout happens to come through in the high-value breast cancer market, this developmental biotech should prove to be a true hidden gem.

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This specialty drugmaker is full of catalysts

Sean WilliamsCorcept Therapeutics): One hidden gem

Roughly 90% of biotech stocks aren't profitable, but Corcept isn't part of that group. The company's only Food and Drug Administration-approved product is Korlym, a treatment for Cushing's syndrome.  Specialty drugs typically have very strong pricing power and minimal competition, suggesting that the company will be able to grow sales both organically in terms of volume, and via price increases, in the years to come. Because of that, it's forecast that  sales will nearly triple between 2016 and 2020 to approximately $211 million.

If there is one concern with a company like Corcept, it's that the company is reliant on a single drug. But there are two key catalysts that could change that.

To begin with, Corcept ended the first quarter with nearly $57.3 million in cash and cash equivalents ($47 million in net cash), and it's probably on track to generate in the neighborhood of $25 million in annual free cash flow over the next couple of years. This would give Corcept somewhere near $150 million in net cash, if not more, to work with by the end of the decade -- funds it could use to fuel internal research, or potentially even purchase new therapies to broaden its portfolio. Investors also shouldn't overlook the outside chance that Korlym's profitability and Corcept's net cash position might act as a dangling carrot, luring in larger acquirer.

The other catalyst is Corcept's pipeline, which offers a number of next-generation products that, like Korlym, block glucocorticoid receptors, but that have potentially fewer side effects. Some of these studies are focused on breast cancer in combination with a chemotherapeutic agent, Alzheimer's disease, and muscular dystrophy. Many are still in the very early stages, but they offer the promise of a more diverse portfolio to come.

Considering it's sporting a PEG ratio of just 0.9, Corcept could still have ample upside.

A winning formula

Brian Feroldi

As its name suggests, LaMaitre is a provider of medical products that are primarily used by vascular surgeons. The company's strategy is to buy or build niche products that can be used to treat peripheral vascular disease (PVD) -- a blood circulation disorder that affects more than 200 million people worldwide. The disease is caused by the buildup of fatty deposits inside blood vessels that can restrict blood flow, which can lead to a range negative outcomes including organ damage, loss of limbs, and even death.

One way to treat PVD is through elective surgery, which is where LaMaitre comes into the picture. The company sells 15 different lines of products used during vascular surgery -- think shunts, grafts, patches, and catheters. What most of its products have in common is that they target niche opportunities. In fact, 97% of the company's revenue comes from segments that rack up less than $125 million in total annual sales. Markets that small typically don't interest the big boys much, which helps to limit LaMaitre's competition, allowing it to capture market share more easily, and to push through regular price increases.

Looking ahead, investors should feel confident that LaMaitre can continue to grow its top line as it adds more sales reps, expands geographically, and makes occasional tuck-in acquisitions. When those factors are combined with its steady margin improvement, planned price increases, and stock buybacks, the company looks to stand a good chance at continuing to deliver on its stated targets

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Brian FeroldiGeorge BudwellSean Williamsdisclosure policy

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