Zai Lab Limited (NASDAQ:ZLAB), a US$1.08b small-cap, is a healthcare company operating in an industry, which has experienced tailwinds from issues such as higher demand driven by an aging population and the increasing prevalence of diseases and comorbidities. 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 somewhat weaker growth of 9.84% in the upcoming year , and a massive growth of 43.06% over the next couple of years. This rate is larger than 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, and also determine whether Zai Lab is a laggard or leader relative to its healthcare sector peers.
What’s the catalyst for Zai Lab’s sector growth?
Data analytics and other technology-enabled approaches are creating opportunities for innovations, however, stakeholders have been challenged to keep abreast of this structural shift while under pressure to cut costs. In the past year, the industry delivered growth in the twenties, beating the US market growth of 14.23%. Zai Lab lags the pack with its negative growth rate of -34.31% over the past year, which indicates the company has been growing at a slower pace than its biotech peers. Moreover, the trend of below-industry growth rate is expected to continue in the future with Zai Lab poised to deliver a -44.75% growth compared to the industry average growth rate of 9.84%. This growth is a median of profitable companies of 25 Biotechs companies in US including Bavarian Nordic, Bavarian Nordic and Diffusion Pharmaceuticals. As an industry laggard, Zai Lab may be a cheaper stock relative to its peers.
Is Zai Lab and the sector relatively cheap?
Biotech companies are typically trading at a PE of 27.38x, higher than the rest of the US stock market PE of 18.08x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry did return a higher 17.81% compared to the market’s 11.40%, which may be indicative of past tailwinds. Since Zai Lab’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Zai Lab’s value is to assume the stock should be relatively in-line with its industry.
Zai Lab’s industry-beating future is a positive for investors. If Zai Lab 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 Zai Lab’s fundamentals in order to build a holistic investment thesis.
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Historical Track Record: What has ZLAB’s performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Zai Lab? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.