For investors who are prepared to invest in small-cap stocks, there are some interesting bargains to be found. Here we take a look at two very intriguing stock names from the healthcare sector that have been generating media attention recently with their innovative product offerings. And according to recent analyst reports, both TransEnterix Inc (NYSE:TRXC) and MannKind Corporation (NASDAQ:MNKD) have the potential to soar in the next 12 months. Specifically, these reports predict 44% upside potential for TRXC and over 100% upside potential for MNKD. But all good things come at a price, and both stocks carry a considerable degree of uncertainty before their early promising signs are fulfilled.
Let’s take a closer look at these two stocks now:
Year-to-date this small-cap robotic surgery maker is already up by an incredible 115%. Nonetheless, even after this leap, it is still trading at just $2.76. Shares exploded in mid-October following a crucial regulatory approval for its Senhance minimally invasive robotic system that can assist with abdominal surgeries. However, since mid-October the stock has experienced some serious volatility- with prices falling back due to a key insider sale and a very bearish report from famous short seller TheStreetSweeper. He cautioned that the device had shown limited success in Europe- where it has been approved since 2011- and that it will have to contend with bigger rival Intuitive Surgical Inc which also targets similar procedures.
But TRXC is not giving up the fight so easily. Shares once again soared at the end of October, although this time by closer to 20% rather than 200%. The rally was the result of a double whammy- first an unsubstantiated report of a buyout by Johnson & Johnson, but also a new bullish report from Stifel Nicolaus. As the buyout is still only a rumor, let’s turn and take a closer look at the report now.
Top Stifel Nicolaus analyst Rick Wise released a report on October 29 where he boosts his price target on TransEnterix from $3.75 to $4. This may not sound so significant- but note that the new price target suggests big potential upside of 44% from the current share price. Wise took advantage of the 2017 American College of Surgeons (ACS) meeting to find out what leading surgeons are thinking about the Senhance robotic system. And he liked what he found. According to Wise, there are three key takeaways from his survey: “1) surgeon interest in Senhance is clearly high; (2) surgeons appeared to react positively to Senhance’s differentiated feature set/attractive economics; and (3) those reactions augur well for Senhance adoption, utilization, and our 2018 and beyond revenue projections.”
As a result, he concludes that “the company is making an encouraging start in the US and that EU commercial progress should start to be more visible in 2018.” These are the two largest robotic surgery markets in the world, and equates to a potentially $10 billion market dollar opportunity according to Wise. In addition, there are key differences between the Senhance and rival Intuitive Surgical that are worth bearing in mind. While Intuitive does have a significant head-start (its da Vinci system first launched in 2000) the Senhance is reusable, has better touch ability and a camera that surgeons can control by moving their eyes or head.
However Wise accepts that this success will take time. Although this is a potentially disruptive technology, it does still cost over $1 million and, initially at least, this is bound to limit uptake. Indeed, Wise is only projecting total US and worldwide purchases of 6 systems in 2018, 16 in 2019 and 31 in 2020. In respect of these projections, Wise cautions that: “Projecting emerging technology adoption curves is always a challenge and often highly imprecise. But, that said, we feel directionally comfortable that our projections are plausible when compared to Intuitive Surgical’s early US (only) commercial experience.”
Note that Wise seems to know what he is talking about- on TipRanks he is ranked at #407 out of over 4,700 tracked analysts. From TipRanks we can also see that the stock has a bullish Strong Buy analyst consensus rating. Over the last three months TRXC has received 3 buy ratings and just 1 hold rating. These analysts have an average price target on the stock of $4.50- which suggests big upside potential of over 58% upside from the current share price.
This very cheap healthcare stock is currently trading at just $3.26. But according to a recent report from H.C. Wainwright’s Oren Livnat MNKD can reach $7 within the next 12 months. That works out at huge upside of 115% from the current share price. He reiterated his buy rating on MannKind, a biopharma which develops therapeutic products for diseases such as diabetes and Pulmonary Arterial Hypertension, on October 24. Indeed, MannKind’s most advanced product candidate Afrezza is a unique inhalation powder for diabetes. Taking insulin as a powder instead of by injection can offer several advantages including very rapid absorption and much easier administration.
Livnat is encouraged by the company’s new debt arrangements. He says this frees liquidity up through 2018. “MannKind was scheduled to pay $10M of the $60M Deerfield facility loan principle on October 31, 2017, but struck a deal to both push that out to Jan 15, 2018 and provide for potential conversion to equity” explains Livnat. He says that despite some modest dilution, this deal “leaves MNKD better off that where we’d originally modeled in our initiation report.” At the same time, MNKD is potentially on the brink of a big opportunity in Brazil. The company has just revealed that its Brazilian partner, BIOMM, has submitted Afrezza for a 12-18 month review. Brazil is a top-5 diabetes market, and could potentially be a material contributor writes Livnat, and Livnat adds that “we look forward to additional ex U.S. partnerships in the near term.”
In the end Livnat gives the thumbs up to MNKD. He concludes that a $7 price target is justified because “We believe positive terminal growth is justified given the broadly applicable technology platform, issued Afrezza IP to 2032, and the high generic hurdles for inhalable Afrezza or later pipeline assets.” Also note that his estimates at this point only include Afrezza contribution from the US- and does not assume any of the potential international expansion opportunities.
However, the stock has received one other recent analyst rating, which takes a more bearish tone. On November 1, Maxim Group’s Jason Kolbert assigned a Hold rating to MNKD without a price target. He says: “Based on our model and assumptions, MannKind today has less than two operating quarters of cash.” This concerns him because he believes there will only be a “gradual uptake” for Afrezza because it is “an educationally-driven product.”