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Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. Despite the rosy long-term prospects, short-term headwinds such as COVID inventory destocking have harmed the industry’s returns - over the past six months, healthcare stocks have collectively shed 5.9%. This performance was discouraging since the S&P 500 held steady.

A cautious approach is imperative when dabbling in these businesses as regulation is another unpredictable element that can affect their earnings potential. On that note, here are three healthcare stocks that may face trouble.

AbbVie (ABBV)

Market Cap: $369.3 billion

Born from a 2013 spinoff of Abbott Laboratories' pharmaceutical business, AbbVie (NYSE:ABBV) is a biopharmaceutical company that develops and markets medications for autoimmune diseases, cancer, neurological disorders, and other complex health conditions.

Why Do We Think Twice About ABBV?

1. Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track

2. Inability to adjust its cost structure while its revenue declined over the last two years led to a 10.6 percentage point drop in the company’s adjusted operating margin

3. Performance over the past five years shows its incremental sales were less profitable, as its 2.5% annual earnings per share growth trailed its revenue gains

AbbVie’s stock price of $209.00 implies a valuation ratio of 17x forward price-to-earnings. Check out our free in-depth research report to learn more about why ABBV doesn’t pass our bar.

Bausch + Lomb (BLCO)

Market Cap: $5.61 billion

With a nearly 170-year history dedicated to vision care and eye health innovation, Bausch + Lomb (NYSE:BLCO) develops and manufactures a comprehensive range of eye health products including contact lenses, pharmaceuticals, surgical devices, and consumer eye care solutions.

Why Does BLCO Fall Short?

1. Sales trends were unexciting over the last five years as its 5% annual growth was below the typical healthcare company

2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 23.5% annually while its revenue grew

3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

At $15.93 per share, Bausch + Lomb trades at 20.8x forward price-to-earnings. Read our free research report to see why you should think twice about including BLCO in your portfolio, it’s free.

iRhythm (IRTC)

Market Cap: $3.33 billion

Pioneering the shift from bulky, short-term heart monitors to sleek, wire-free patches, iRhythm Technologies (NASDAQ:IRTC) provides wearable cardiac monitoring devices and AI-powered analysis services that help physicians detect and diagnose heart rhythm disorders.