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The time is right to snap up one of the many good deals in this sector. Here are nine worth considering.
The time is right to snap up one of the many bargains in this sector. Here are nine worth considering.
Healthcare is becoming a more attractive part of the market these days, despite patent expirations, downward pressure on drug prices, and presidential election year concerns about reimportation.
Experts readily name healthcare as a sector that should do well for investors over the next few years. Within the pharmaceutical industry, for instance, the prospects for new drug launches are expected to improve in 2004, thanks to a more responsive FDA and an increase in the percentage of total revenue spent on research and development. In the biotech field, several companies could gain approval for potentially blockbuster products within the next year or two.
We asked five experts to share with you their top healthcare stock picks. Most of these companies are currently undervalued by Wall Street, which means you can pick up shares of them at a discount to their true worth. Here's what the experts are recommending:
The world's largest biotech, Amgen had a strong 2003, thanks in large part to its acquisition of Immunex in 2002. The purchase allowed Amgen to add to its roster Immunex' highly successful drug Enbrel, which is FDA-approved for rheumatoid arthritis, psoriasis, and several other conditions.
Aranesp, another blockbuster drug in the Amgen lineup, is used in the treatment of anemia associated with chronic renal failure and chemotherapy. "Remarkably, Amgen was able to grow Aranesp without disrupting sales of Epogen, which is also indicated for dialysis patients," says Sunaina Murthy, a San Francisco-based senior healthcare analyst for AIM Investments. Aranesp has a longer half-life than Epogen, she says.
Murthy says Amgen's stock is currently cheap compared to that of other large biotech companies. The price reflects the risks associated with changes in the way the federal government will reimburse medical practices for cancer drugs administered to hospital outpatients. Regardless of what the new reimbursement formula looks like, however, Murthy is optimistic about Amgen's long-term prospects. "The company has a very interesting product pipeline, with medicines for oral mucositis, osteoporosis, and cancer in various stages of development."
The pending merger of Anthem with WellPoint Health Networks will make it the country's largest managed care organization, with about 28 million people covered by its insurance plans.
"The merger will provide Anthem with an opportunity to sell its product nationally, rather than just regionally," says Kris Jenner, a surgeon turned portfolio manager who manages the $1.3 billion T. Rowe Price Health Sciences Fund. "I think the company's earnings can grow at 15 percent a year for the next two to three years. The stock is currently trading at $88 a share. It could be between 120 and 130 within the next 18 months."
It's not just the number of patients, however, that will ensure Anthem's success, Jenner says. The company has shown that it can manage costs effectively without compromising its level of service. The balance sheet is strong and cash flow is consistent.
This $3 billion eye care company has made a lot of moves to strengthen itself in recent years, says Gary C. Hatton, executive vice president and chief investment officer for Granahan Investment Management, a subadviser to several Vanguard mutual funds. "It had gotten fat and happy during the 1990s, so in 2001 the company brought back a former top executive, Ron Zarrella, who trimmed overhead costs and divested Bausch & Lomb of businesses that weren't central to ophthalmics."
Contact lenses make up almost one-third of Bausch & Lomb's business, Hatton says, but the company also produces ophthalmic drugs and technology that's used in laser vision correction surgery. The revenue mix is balanced nicely across the globe, with slightly less than half of sales coming from the US, one-third from Europe, and the rest coming from the Far East.
Although Bausch & Lomb has set a near-term earnings growth target of 15 percent a year, the company will probably grow at 20 percent annually through 2006, Hatton says. "They're being cautious with Wall Street, but I think they'll exceed their own projections."
This $2 billion company, which is based in Wilmington, MA, specializes in providing rats and mice for research and toxicology testing. With pharmaceutical and biotech companies increasing their overall spending on research and development, Charles River Labs is likely to benefit.
Like Bausch & Lomb, Charles River Labs' near-term earnings estimates may be overly conservative. "It should be able to grow earnings greater than 15 percent a year for the next few years," says Erin Xie, portfolio manager of the Boston-based State Street Research Health Sciences Fund.
In addition to providing animals for research, Charles River Labs has created a portable endotoxin-testing device for which it's seeking FDA approval. "The standard device takes about three days to process results; the new one takes about 15 minutes," says Xie. "It'll be used in drug manufacturing facilities, but it can also be used in hospitals and food processing facilities. This device could bring in about $200 million a year in revenues for the company, which currently has $600 million in annual sales. So it has the potential to be a big part of its business."
A competitor of Bausch & Lomb, this is another company worth investing in this year, says Gary Hatton. "The entire contact lens business is underappreciated and underestimated by Wall Street," he explains. "When laser vision correction surgery began attracting attention, people assumed that it would put vision and contact lens companies out of business. That didn't happen. Nor did the emergence of companies like 1-800 Contacts take away much business. It seems patients still prefer to get their prescriptions filled by the same optician or ophthalmologist who handles their eye exams."
The Cooper Companies, which develops and produces contact lenses under its CooperVision subsidiary, also makes diagnostic and surgical instruments and operates facilities to treat psychiatric disorders and substance abuse. Hatton expects the company's earnings to increase 25 percent annually for the next couple of years. "The myopia rates in teenagers are higher than ever, because kids are spending more time looking at computer screens and playing video games," he says. "As teenagers, they're not candidates for laser vision surgery, nor do many of them think it's cool to wear glasses."
Moreover, contact lens technology has improved greatly over the past 10 years. Specialty lenses for people with astigmatisms and for those who normally wear bifocals are becoming very popular. "Cooper Companies and Bausch & Lomb have concentrated their efforts on specialty lenses, which is the fastest growing portion of the lens market," Hatton says. "Despite the fact that the companies compete against each other in some arenas, there's still plenty of business to be had here and overseas."
A dominant player in cervical cancer screening and in women's health products in general, Cytyc has captured more than two-thirds of the domestic market for Pap tests within six years. It also has signed exclusive agreements with the US Army, Navy, and Air Force to provide its testing technology at overseas screening centers. International markets, which currently account for only 10 percent of Cytyc's revenues, remain an excellent growth opportunity.
"Earlier this year, Cytyc bought a company called Novacept, which has an endometrial ablation device to treat excessive menstrual bleeding," says State Street Research's Erin Xie. "Novacept's device is superior to and easier to use than competing devices, which should allow Cytyc to capture a greater share of this market."
On the downside, competition is emerging domestically for Cytyc's Pap test business, which means growth in this area could slow. In addition, a rival, TriPath Imaging, has sued the company for patent infringement, which Cytyc responded to by filing a suit to invalidate the patents in question. (Cytyc anticipates that a trial will be scheduled next year.) So while the stock has good long-term potential, it could experience some volatility over the coming months. If you're not willing to risk a rocky ride in the short term, look elsewhere.
Once a small biotech startup, Gilead Sciences is now a profitable $14 billion pharmaceutical company, with a niche in anti-infectives. Its emergence has come thanks in large part to Viread, its blockbuster HIV drug, which the FDA approved in October 2001.
Gilead Sciences has a bright future. In 2005, it's expected to win approval for a single pill that combines Viread and Emtriva, which is for monotherapy. "The standard regimen in HIV medicine is generally three anti-HIV drugs, so this new combination therapy will clearly improve patient compliance," says T. Rowe Price's Kris Jenner.
The combination drug, which is yet unnamed, is expected to become the standard of care in the treatment of advanced-stage HIV patients. "As this new pill becomes more widely available, Gilead's earnings are going to accelerate," says Jenner, who adds that Gilead is doing some discovery work on a drug for hepatitis C. "I think the company could be worth 75 a share in 18 months." That's about a 14 percent increase from its current price.
This biotech company, based in Lexington, MA, recently received FDA approval of trospium, which is targeted to treat overactive bladder. Indevus estimates that the condition affects more than 17 million people in the US. "This is a growing problem among postmenopausal women," says biotech expert John McCamant, editor of Medical Technology Stock Letter (www.bioinvest.com). "There are a couple of drugs out there to treat it, but they cause patients to suffer acutely from dry mouth. With the exception of those drugs, you go to Dependsin some cases for women in their 40s and 50s."
McCamant says the side effects of trospium are minimal, and that it's one of the top sellers for overactive bladder in several European countries."It doesn't appear to cross the blood-brain barrier, so it has almost no drug-to-drug interaction," he says. "That can be very important in elderly patients who take multiple medications every day. In addition, it appears that trospium doesn't get metabolized until it reaches the bladder. That's also part of why it doesn't interact with other drugs.
This pharma giant looks strong relative to its peers, having benefited greatly from its 2003 merger with Pharmacia. According to Morningstar, the Chicago-based investment research firm, Pfizer now has 14 of the world's 25 best-selling drugs.
Pfizer has some products that will lose patent protection in 2006 (Zoloft) and 2007 (Norvasc, Zyrtec), but "the strength of the products that have recently been launched, as well as drugs in its pipeline, should help to mitigate any losses in sales," says AIM Investments senior healthcare analyst Sunaina Murthy. She adds that two drugs in particular show tremendous promise: a CETP-inhibitor to raise HDL cholesterol levels, and a VEGF-inhibitor for age-related macular degeneration. Both are in Phase 3 clinical trials.
Once approved, physicians can expect to hear plenty about both of these new drugs. "Pfizer has one of the strongest marketing teams among its peers," Murthy says. "Its efforts have helped Pfizer products maintain and, in some cases, grow market share in the face of increased competition in certain areas, such as cholesterol-lowering and erectile-dysfunction drugs."
Murthy isn't worried about the impact of the $430 million in damages, liabilities, and fines recently levied against the company for inappropriate marketing of Neurontin, either. "The case concerned certain product-related claims that Warner-Lambert made before Pfizer acquired it, and involves a one-time payment," she says, pointing to the fact that Pfizer's a $260 billion company, which had revenues of $12.5 billion in the first quarter of 2004 alone.
|Ticker||52-week high-low||Recent price||P-E ratio|
|Bausch & Lomb||BOL||67-36||62||25|
|Charles River Laboratories||CRL||49-29||43||27|
|The Cooper Companies||COO||64-32||59||26|
Dennis Murray. Bargain healthcare stocks worth buying. Medical Economics Aug. 6, 2004;81:25.