While the healthcare sector may have a reputation for being a challenging and risky segment of the market in which to invest, a number of success stories have emerged in 2009 that demonstrate the reward the sector holds for astute investors. While an understanding of the underlying science and technology can be helpful when making investment decisions in these companies, investment strategies similar to those which are used in other sectors apply for the most part to healthcare companies as well. For mature companies, the focus is largely on the same fundamentals that apply to any revenue generating business. For development stage companies, strategies may be more event-driven or based on momentum.
Mature Healthcare Companies
The share prices of many profitable companies were down substantially in 2008, generally hitting lows in November. In some cases, this decline was perhaps more a result of general market declines than a result of impairment of their long term business potential – ‘beaten up but not broken’.
Development Stage Healthcare Companies
Clinical data, regulatory decisions and partnerships are major events which impact share prices for companies developing products. The general timing for clinical and regulatory events is public information. The result of an event can work in either direction.
The examples below are meant to suggest that even in a beaten up sector like healthcare, investment opportunities exist. Healthcare spending already represents 15 percent of the U.S. economy and global spending is expected to increase as China and India demand access to services that already exist in the West. The risk inherent in a healthcare investment is commensurate with the reward. But given its size today, and the growing demand for it, the market isn’t going away and those that choose to ignore it are missing a critical component of the high growth aspect to a balanced investment strategy.
Mature Company WINS (movement from November 2008 lows)
Extendicare (EXE.UN) up 138% - distributions 11.3%;
Chartwell (CSH.UN) up 116% - distributions 8.4%.
Event Driven WINS (movement from 52-week lows)
OncoGenex Pharmaceuticals (OGXI) up 1,754% on Phase 2 data and potential partnership;
Dendreon (DNDN) up 947% on Phase 3 data;
Spectrum Pharmaceuticals (SPPI) up 1,245% on product and regulatory news;
YM BioSciences up 515% on regulatory news.
Momentum WINNERS
The share prices of development-stage healthcare companies can be quite volatile, which can lead to opportunities for ‘bottom-fishing’ and ‘momentum plays’ not triggered by major events. Angiotech (ANP) originally developed a drug delivery technology applied to cardiovascular stents and, after commercialization of this technology, bought a company with specialty surgical medical devices. On November 25, 2008, the share price hit a low of 11 cents, meaning the market cap was less than $10 million. By looking at the Q3 2008 financial results, the full 2008 financial results could be estimated to include about US$180 M in product sales, US$60 M in royalties, US$40 M in cash and US$550 M in debt. Potential investors may have looked at that 11 cent share price and asked whether it might bounce even part way to the historical high of almost $40. Other potential investors may have asked what the company would be worth as an acquisition candidate. In any case, the share price climbed to a 2009 high of $3.10 on June 8, 2009 and is currently trading at $1.87, an increase of 1,600%.
Tags: healthcare