Is Zai Lab Limited (ZLAB) Thriving Or Barely Surviving In The Healthcare Sector?

Zai Lab Limited (NASDAQ:ZLAB), a USD$1.30B small-cap, operates in the healthcare industry, which faces key trends such as rising demand fuelled by an aging population and the growing prevalence of chronic diseases. The growth in development of new drugs for unmet needs, as well as the ongoing and increasing need for biotech drugs as Baby Boomer generation continues to age, are growth drivers for the positive outlook in the biotech industry over the long term. Healthcare analysts are forecasting for the entire industry, a relatively muted growth of 6.42% in the upcoming year, and a whopping growth of 43.65% over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the US stock market as a whole. Is the biotech industry an attractive sector-play right now? Below, I will examine the sector growth prospects, as well as evaluate whether ZLAB is lagging or leading its competitors in the industry. Check out our latest analysis for Zai Lab

What’s the catalyst for ZLAB’s sector growth?

NasdaqGM:ZLAB Past Future Earnings Oct 25th 17
NasdaqGM:ZLAB Past Future Earnings Oct 25th 17
New R&D methods and big data analytics are creating opportunities for innovations, however, stakeholders have been challenged to keep abreast of this structural shift while under pressure to cut costs. Over the past year, the industry saw negative growth of -60.80%, underperforming the US market growth of 4.49%. ZLAB lags the pack with its negative growth rate of -63.80% over the past year, which indicates the company will be growing at a slower pace than its biotech peers. However, the future seems brighter, as analysts expect an industry-beating growth rate of 77.69% in the upcoming year. This future growth may make ZLAB a more expensive stock relative to its peers.

Is ZLAB and the sector relatively cheap?

NasdaqGM:ZLAB PE PEG Gauge Oct 25th 17
NasdaqGM:ZLAB PE PEG Gauge Oct 25th 17
The biotech sector’s PE is currently hovering around 31x, higher than the rest of the US stock market PE of 22x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry did return a higher 15.86% compared to the market’s 9.99%, which may be indicative of past tailwinds. Since ZLAB’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ZLAB’s value is to assume the stock should be relatively in-line with its industry.

What this means for you:

Are you a shareholder? ZLAB’s industry-beating future is a positive for shareholders, indicating they’ve backed a fast-growing horse. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto ZLAB as part of your portfolio. However, if you’re relatively concentrated in biotech, you may want to value ZLAB based on its cash flows to determine if it is overpriced based on its current growth outlook.

Are you a potential investor? If ZLAB has been on your watchlist for a while, now may be the time to enter into the stock, if you like its growth prospects and are not highly concentrated in the biotech industry. However, before you make a decision on the stock, I suggest you look at ZLAB’s future cash flows in order to assess whether the stock is trading at a reasonable price, as well as other important fundamentals such as the company’s financial health in order to build a holistic investment thesis.

For a deeper dive into Zai Lab’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other healthcare stocks instead? Use our free playform to see my list of over 1000 other healthcare companies trading on the market.