This a great market for stock pickers. Multiples have been cut in half for a lot of small-caps as the stock market has no appetite for risk right now. Nonetheless, if you do a lot of digging, you can find stocks with remarkable upside.
Here's why our roundtable likes Affimed (AFMD 1.57%), Outset Medical (OM -5.79%), and InMode (INMD -1.62%).
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A woefully underappreciated cancer stock
George Budwell (Affimed): If you're on the hunt for a little known biotech stock with enormous upside potential, the German immunotherapy company Affimed should definitely be on your radar. The core reason is that Affimed's stock appears to be incredibly undervalued at current levels.
What's the backstory? Affimed is developing an anticancer tech known as innate cell engagers. These molecules link natural killer cells/macrophages to tumor cells to ramp up tumor cell killing. While the basic idea behind this tech is relatively simple when compared to more complex antibody approaches, the results speak for themselves. Speaking to this point, Affimed's early-stage trial for its lead product candidate, AFM13, yielded exceptional results in a population of heavily pretreated patients with recurrent or refractory CD30-positive lymphomas late last year.
What's coming down the pike? Affimed is set to release the second batch of results from this prior trial on April 10, 2022 at an upcoming scientific meeting. Perhaps more importantly, though, the biotech is also on track to unveil the highly anticipated study results for its registration-enabling trial for AFM13 in patients with peripheral T-cell lymphoma in the second half of 2022. Taken together, these first two indications for AFM13 could generate well over $1 billion in sales as soon as 2025.
On top of these near-term catalysts, Affimed is slated to roll out several additional clinical updates for its other pipeline candidates over the next 12 to 24 months. Aggressive investors, therefore, may want to get acquainted with this small-cap biotech soon.
The beginnings of a multibillion-dollar disruption
Patrick Bafuma (Onset Medical): Medical-device maker Outset Medical is making chronic kidney-failure patients' lives easier. Its Tablo system is an at-home hemodialysis machine that reduces the complexity of home dialysis. And the Centers for Medicare & Medicaid Services agrees, having deemed Tablo a substantial clinical improvement over current home hemodialysis. That may be a major tailwind for the company to disrupt the $8.9 billion U.S. home dialysis market.
On the back of Uncle Sam's positive feedback, Outset presented positive data at the National Kidney Foundation Spring Clinical Meeting earlier this month. A survey of dialysis patients found 72% viewed Tablo as a significant improvement over current in-home treatments, and 77% of patients felt the company's disruptive technology would make them more likely to try at-home hemodialysis. Just over three-quarters of nephrologists thought Tablo was a significant improvement over current devices, and 98% said its features would make them more likely to recommend home hemodialysis. Considering that nephrology buy-in is essential for the device makers' success, investors have reason to be excited about Outset's future.
The company is in full-on growth mode too, with $102.6 million in fiscal year 2021 sales -- a 105.5% increase compared to the year prior. It has signed agreements with 7 of the 8 largest health systems and a third of the largest 100 regional health systems. And with nephrologists, patients, and Uncle Sam all fond of Tablo, as well as a strengthening foothold within healthcare systems, it is becoming clear that Outset is a developing force in the industry. While it is by no means cheap at a current price-to-sales ratio of about 21, the company is rapidly gaining ground in a multibillion-dollar addressable market. Because of that, I think Outset Medical has plenty of runway to keep investors smiling for years to come.
A high-growth platform biotech with recurring revenues
Taylor Carmichael (InMode): I don't own shares of InMode yet, but it's one of the healthcare stocks at the top of my watchlist. This is a hugely profitable small-cap stock, with 46% profit margins. And it's fast-growing too, with 47% revenue growth in its most recent quarter. The company specializes in minimally invasive devices for plastic surgery. Now, plastic surgery is a mature market -- $50 billion a year and growing at a 3% clip. So InMode is interesting because it's successfully grabbing market share.
Why is demand skyrocketing for InMode's devices? The company's technology relies on radio frequency (RF) devices that are non-invasive. So that's a big deal. Right now there are 2.5 million cosmetic surgeries done every year around the world. Plastic surgery is expensive and has all the risks of surgery: It requires anesthesia; there can be a recovery period; and there's the likelihood of some scarring. Non-invasive surgeries are safer and cheaper.
For instance, there are 40 million laser procedures done every year. These types of procedures are 16 times more common than plastic surgery. That's because lasers -- like RF devices -- are non-invasive. But lasers are very limited in scope and typically used for things like hair removal, pigmented lesions, vascular lesions, leg veins, and acne. InMode's sales are spiking dramatically because its non-invasive devices can do contouring and refiguring similar to what plastic surgery can do but without the cost or the risk of invasive surgery.
Like a lot of high-growth names, InMode has been hammered recently, and the stock has dropped from $99 a share back in November to $35 a share today. But that just represents a slashing of the multiple. The price-to-earnings (P/E) ratio has been crushed, from 53 times earnings to 18 times. And the stock is trading at just eight times revenues, which is incredibly cheap given the growth rates.
InMode had $110 million in sales in the fourth quarter, and 89% of its sales were devices. InMode now has 11,600 devices placed around the world. And it's making dramatic inroads outside of the plastic surgery market. It's expanding into female health and wellness, and selling its devices to gynecologists. InMode is not only taking market share from surgical options; the company is also expanding its market opportunity. There are 45,000 gynecologists around the world, almost three times as many doctors as InMode's original market.
What I like most about this business, however, is the recurring revenues. Those numbers are spiking dramatically. InMode sold 132,000 disposables in Q4, up from 94,000 in Q3. This reminds me of Intuitive Surgical (ISRG -0.73%). Once doctors lock onto a platform, investors can expect recurring revenues to flow out of the use of the device. With InMode, you're not just buying a fast-growing medical-device company. You're buying shares of a platform technology, with each device generating more revenues in the future. The upside is significant here, in my opinion.
