2 Growing Healthcare Stocks You Should Know

If you were asked to name the greatest healthcare stocks of the last decade, do you think you could? When I was researching an article on the subject, I was surprised by the winners. I had no idea that any of these companies had run up so far. But at least I had heard of most of these stocks; companies like DexCom, Abiomed, and Exact Sciences are familiar to a lot of Fools.

On the other hand, two of the best healthcare stocks over the past decade were complete mysteries to me. Both of these companies were micro-caps in 2010, and they went on to have magnificent runs…

Accelerate Diagnostics (NASDAQ:AXDX) had a 19-bagger for the decade, and Simulations Plus (NASDAQ:SLP) returned 2,000% to its investors. Let’s dig a little deeper into them.

Speeding up diagnosis of infectious disease

Accelerate Diagnostics is a fascinating medical device company. Accelerate sells a device called the Accelerate Pheno, a small machine that tests for bacteria and fungus infections right in the hospital. The status quo is to run a test on a patient, send it off to a lab, and get the response back in two to three days. With Accelerate Pheno, the doctors can get a response back in a matter of hours, and that speed makes a big difference in treatment.

When you are invaded with bacteria or fungus, your body can have an extreme immune response, called sepsis. About 270,000 people die from sepsis every year in the United States. Sepsis also costs hospitals an estimated $27 billion each year — it’s the No.1 cause of hospitalizations in the U.S. Most of these sepsis deaths are preventable if the doctors know what the infection is.

Speed is paramount in these situations, and the Accelerate Pheno cuts the wait time by 75%. It’s over 40 hours faster than traditional methods.

It’s early in the company’s story. Right now, it’s broadening its focus from selling to the top hospitals (influencers) to selling to all hospitals. In the last quarter, Accelerate reported 167 instruments sold so far in 2019. There are 6,146 hospitals in the U.S., so there’s a huge runway for growth.

One exciting thing about Accelerate Diagnostics is that the company has a razor-and-blades business model. It sells its Accelerate Pheno in a one-time purchase, and then racks up recurring revenue from the use of the device. Once the hospital buys the machine, high-margin future revenue is pretty much assured — consumables (the recurring revenues from the use of the device) are growing by 150%.

Accelerate recently hired a new chief operating officer, Jack Phillips, who will become CEO when Lawrence Mehren retires next month. Phillips was the CEO of Roche Diagnostics, a subsidiary of Roche. Roche is a mega-cap ($275 billion), so to have the chief executive of its diagnostic division step down to become COO of a tiny company deserves attention.

Sales are expected to start ramping this year, and insiders are getting excited. Tom Brown, a member of the board of directors and a former executive at Abbott Laboratories, recently bought $136,000 worth of shares on the open market, at a price of $14 a share.

Using computer models to predict how drugs will do in the lab

Simulations Plus has been around for 24 years, growing from a tiny micro-cap into a $600 million small cap. Its modeling software is used by 19 of the top 20 pharmaceutical companies, as well as many biotechs and regulatory agencies.

Simulation Plus offers an array of software, including its flagship product, Gastro Plus, a modeling platform that simulates various absorption rates of molecules through all the major dosing routes. It’s faster and cheaper to do these tests on the computer than in the lab. One of the modules of Gastro Plus allows scientists to test for drug-drug interactions. The company also sells ADMET Predictor, a software that analyzes absorption, distribution, metabolism, excretion, and toxicity of various molecules.

The company rang up $8 million in revenue in its most recent quarter, growing its top line about 20% from the same period the previous year. Its profit margin sits at 25%, with $11 million in cash and no debt. One worry with Simulations Plus is how expensive the stock is, with a trailing price-to-earnings ratio of 70 and a PEG ratio (price-to-earnings growth) over 4. . But it’s clearly a well-respected name in the pharmaceutical space. If the company can…

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