The healthcare sector is an area which is often overlooked by investors. After all, it is usually seen as a relatively defensive arena which lacks the potential to generate high growth. However, it could become an increasingly relevant investment prospect as the world's population ages and grows. Therefore, allocating some capital within an ISA to healthcare stocks could be a shrewd move.
While there are a variety of companies operating within the industry, here are two stocks which appear to offer strong growth prospects. Although potentially risky, their return prospects seem to be high.
Reporting on Friday was biopharmaceutical company Mereo(LSE: MPH). It focuses on the acquisition, development and commercialisation of innovative therapies that are aimed at patients who have rare and speciality diseases. Its performance in 2017 was relatively encouraging, and saw it releasing various pieces of positive top-line data.
In fact, alongside the positive BGS-649 data which was released last week, the company has now successfully completed two substantial Phase 2 studies on its speciality pharma product candidates. It has also initiated a Phase 2b study, while highlighting the long-term potential of its business model through the in-licensing of AZD-9668 from AstraZeneca.
Looking ahead, Mereo is seeking to diversify its portfolio alongside potentially initiating additional clinical studies in 2018. It seems to have a positive future and could deliver improving share price performance. As such, and while at the riskier end of the investment spectrum due in part to its lack of profitability, the company could offer high returns in the long term.
Offering a more balanced risk/reward ratio at the present time is BTG(LSE: BTG). The interventional medicine specialist has been able to generate a relatively consistent growth rate in recent years. Its bottom line has risen at an annualised rate of 15% during the last five years, which suggests it has a relatively strong business model.
Looking ahead, the company is expected to post a rise in its bottom line of 26% this year, followed by growth of between 10% and 15% in the next two financial years. These figures suggest that the stock could offer upside potential - especially since it trades on a price-to-earnings growth (PEG) ratio of just 1.2.
With the outlook for the wider stock market being relatively uncertain at the present time, stocks which offer lower positive correlation to the wider economy could prove popular. Such companies could include healthcare stocks such as BTG, since it seems to have at least some degree of defensive characteristics.
While the company lacks a dividend and is not expected to pay one over the medium term, it appears to have a good alternative use of capital in terms of reinvestment for future growth. As such, now could be the right time to buy it while it has a wide margin of safety.
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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca and BTG. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.