Many companies that performed well in the early pandemic years have since fallen off the radar or at least have seen their shares drop substantially during the past three years. Telemedicine Teladoc Health (TDOC 2.92%) and vaccine maker Novavax (NVAX -0.47%) belong in this group: Both have significantly lagged behind the market since 2021. However, these healthcare specialists are actively trying to return to their outperforming ways. If they succeed, they will produce outsize returns for investors who purchase their shares today. Let's consider why they might be able to pull it off.
1. Teladoc
Those who wanted medical care in 2020 and 2021 -- as government-imposed lockdowns were in full force and health systems were swamped with COVID-19 patients -- found an alternative in telemedicine. Teladoc was a leader in the rise of telehealth during the pandemic, allowing patients to receive basic consultations, prescriptions, and referrals from the comfort of their homes. Teladoc also started providing virtual therapy through its BetterHelp segment and various services to those with chronic health illnesses, particularly diabetes, through its acquisition of Livongo.
Things were going great initially: Teladoc's revenue was rising fast, and although it remained unprofitable, it seemed to be moving toward profitability. However, the pandemic-related tailwind ended, revenue growth slowed, and net losses plunged to catastrophic levels in some quarters, largely due to noncash impairment charges. Can Teladoc turn things around?
The company appointed a new chief executive officer, Charles Divita, in June. Under new management, the company is looking to improve on various fronts, including offering new services and expanding internationally. Teladoc still has a vast ecosystem: It boasts 93.9 million members in its integrated care segment. International revenue is growing faster than the company's total revenue, highlighting the opportunities abroad. Further, telemedicine is likely here to stay. According to projections, the market will continue to grow in the coming years.
That's not surprising considering the convenience it offers both physicians and patients. As a leader in the niche, Teladoc could benefit. If its plans pan out, the company could improve its financial results and eventually turn a profit, especially considering its wide gross margin, usually about 70%.
TDOC Gross Profit Margin (Quarterly) data by YCharts
If the company can improve top-line growth and control expenses, especially advertising and marketing costs, profit could be around the corner. That scenario will help Teladoc deliver excellent returns to investors who initiate positions today.
2. Novavax
Though Novavax is down substantially since 2021, it has performed well this year. The company signed a lucrative agreement with biotech giant Sanofi that will grant the latter the rights to Novavax's COVID-19 vaccine in most countries starting in 2025. The deal also stipulates that Sanofi will be able to use Novavax's proprietary adjuvant technology to develop some vaccines. Novavax received an upfront payment of $500 million with the potential for $700 million in milestone payments in addition to future royalties.
This was a significant windfall for Novavax, which can now focus on developing other vaccines.
The company has two leading candidates: One that targets influenza and another that is a combined COVID/flu vaccine. Novavax's shares recently dropped off a cliff when the U.S. Food and Drug Administration placed its planned phase 3 clinical trials for these candidates on clinical hold due to suspected adverse reactions. However, the clinical hold has since been lifted.
If these products prove effective in phase 3 studies they could earn approval within a couple of years. Novavax's market cap is just $1.4 billion. At these levels, the company does not need products that generate tens of billions of dollars in revenue to be successful. If these two candidates pass phase 3 studies, earn approval, and carve out solid niches in the very active COVID-19 and influenza vaccine markets, Novavax's shares will perform very well along the way.
Read the fine print
Both Teladoc and Novavax have significant upside potential. But they also carry above-average risk. Teladoc faces stiff competition in telemedicine. That is one of the reasons it has spent so much on advertising and marketing. Even as it attracts more customers, its business hasn't proved profitable yet. And although international expansion seems promising, that could also stretch its resources thin.
Novavax could encounter more unforeseen regulatory troubles. Its vaccines could flop in phase 3 studies, and even if they succeed, they might not meet investors' expectations compared to other candidates also targeting these markets. A lot needs to go right in both of these companies to deliver excellent returns. Interested investors should keep that in mind before initiating a (small) position in either.
