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If you are one of many retail investors camped on the sidelines bemoaning the dearth of any investing opportunities in these horrible market conditions, you should look at the ASX Health Care Sector.  In the face of gale force winds, this sector is solidly outperforming.

To illustrate let’s look at one of Australia’s largest pharmaceutical companies – CSL Limited.  CSL is a biopharmaceutical company that researches, develops, manufactures and markets products to treat and prevent serious human medical conditions.  Geographic segments include the USA, Germany, Australia, Switzerland, and other countries.  The following chart compares CSL share price movement year over year compared to the ASX 200 Index, the XJO:

As you know, even in the worst of times, some companies outperform not only the overall market, but also their peers within their own sector.  Is CSL such a company?  Are they a standout stock within the Health Care Sector?  The next chart addresses the question.  Here is CSL share price movement compared to the ASX Health Care Index, the XHJ:

While the XJO is down about 15% year over year, the Health Care XHJ index is up about 5%.  Of course not every health care share is outperforming.  But of the many different types of companies within the sector, pharmaceutical companies could represent the best opportunities.

A topic we’ve covered lately is the growing pressure that retiring Baby Boomers are placing on health care services.  And the government is a primary payer for health care.  The following chart from the government’s Treasury Department shows the expected growth by health care segment:

Projected growth in components of Commonwealth health spending

 

Pharmaceutical benefits represents the highest projected growth in Commonwealth health spending within the next 40 years.

Obviously, not all pharmaceutical companies are created equal.  In one sense, an ideal candidate would be a company with a diversified product line serving diversified and growing markets.  While companies like these represent lower risk investments, there are also opportunities out there in providers serving niche markets with high profit potential.  The following table includes 10 Aussie Pharmaceutical Companies worth researching further:

Company

Code

Market Cap

Share Price

52 Wk Hi

52 Wk Lo

Div Yld

P/E

P/EG

CSL Ltd

CSL

$19,265M

$37.65

$38.33

$26.12

2.2%

20.34

1.8

Acrux Ltd

ACR

$723M

$4.34

$4.42

$2.59

123.47

10.0

Sigma Pharmaceutical

SIP

$723M

$0.61

$0.76

$0.38

5.9%

14.32

1.54

Starpharma Holdings

SPL

$445M

$1.58

$1.88

$0.92

Pharmaxis Ltd

PXS

$354M

$1.16

$1.45

$0.56

Phosphagenics Ltd

POH

$179M

$$0.18

$0.24

$0.10

Vita Life Sciences

VSC

$21M

$0.36

$0.37

$0.18

1.4%

16.98

Probiotic Ltd

PBP

$14M

$0.26

$0.44

$0.24

5.5

.06

BioDiem Ltd

BDM

$8M

$0.08

$0.15

$0.07

 

Of these 10 companies, only three are underperforming right now and the one that should pique the interest of value investors is Probiotics (PBP).

Probiotics (PBP) has operations in Australia and internationally.  They develop, manufacture, and sell pharmaceuticals, foods and nutraceutical products.  Neutraceuticals are the latest power foods with both health and medical benefits.  They have five business segments covering a variety of pharmaceutical products as well as human and animal nutrition and weight management.  Their dedication to research and development of new and innovative products should be of interest to any investor with a longer-term investment horizon. 

The company’s NPAT dropped from $9.5 Million in 2010 to a loss of $10.3 Million in 2011.  In August 2011 they announced no dividend for 2011 and in February this year, the company announced no dividend for the first half of 2012.  The double-barreled hit, plus lowered guidance, sent the shares into a tailspin.  Here is its year over year share price chart:

The value case for this company is compelling.  A P/E of 5.5 versus the sector P/E of 21.82 coupled with an ultra-low P/EG of .06 compared to a sector P/EG of 7.54 are attractive numbers for value investors.  What’s more, a Price to Book Ratio of .23 shows PBP is trading close to book value.  They have substantial brand identification with distribution through pharmacies, health food stores, and major supermarkets.  They also operate their own online sales site. 

If you are the kind of investor that is wary of possible value traps, however, there are other plays here with less risk.

Novagen (NRT) is also underperforming the sector.  Novagen is something of a niche player, developing and marketing products in the consumer healthcare sector as well as in the research and development of pharmaceuticals targeted the treatment of cancer, heart disease, osteoporosis, chronic inflammatory diseases and inflammatory bowel disease.

Their one year price chart reflects a string of sour news.  They sold a consumer products division, eliminated their dividend, and announced a capital raise.  Here is the chart:

So why should any investors consider this company?  Its major strength is its intellectual property with the Isoflavonoid Technology Platform.  This innovative approach makes use of naturally occurring plant compounds called flavenoids. The platform is used to create both consumer healthcare products and specialised prescription drugs. 

The company recently announced the beginning of Phase 1 clinical trials in the US for one of their cancer drugs.  This is a stock to watch.

BioDiem (BDM) is the final underperformer.  This company is a pharmaceutical development company focused on translating their extensive research for vaccines, infectious diseases and other therapeutic areas into marketable products. 

BioDiem’s leading product is the Live Attenuated Influenza Virus (LAIV) technology, which has been used to develop a novel intranasal vaccine for seasonal and pandemic influenza.  The product is currently on the market in India.  Under development are two new entries, BDM-I and BDM-E.  Currently their principal source of revenue is licensing their LAIV.

Here is their chart:

The investment thesis for this company is similar to NRT.  They have intellectual property that has already placed a viable product in the market, although limited to India.  The company has been granted an additional US patent that expands the patent position for the Company’s antimicrobial compound BDM-I, an antimicrobial compound for treating infectious diseases.  BioDiem is partnering with Foundation Fighting Blindness in the US to test eye disease therapeutic BDM-E in preclinical models of retinitis pigmentosa.  The company has entered into a research agreement with the Maryland-based Foundation’s National Neurovision Research Institute, as well as the University of Miami in Florida, for the pre-clinical study.

Acrux Ltd (ACR) is another company struggling to show profitability while at the same time exhibiting strong potential.  They have two drugs that have successfully completed clinical trials with marketing partners in place.  One is Axironin, a treatment for hypogonadism, in partnership with US pharmacy giant Eli Lilly.  The second is Estradiol for the treatment of menopausal symptoms with another US firm, KV Pharmaceuticals as marketing partner. 

Australia’s TGA (Therapeutic Goods Administration) has granted Lilly marketing authorisation for Axiron and the Pharmaceutical Benefits Advisory Committee (PBAC) has approved the listing of Axiron on the Pharmaceutical Benefits Scheme.

With two products with strong marketing partners and four more in the pipeline, this company is worth a look.

Starpharma Holdings (SPL) is one of those companies involved in technologies that can be difficult for the layperson to grasp.  What they do is based on something called dendrimers, which they describe as “a type of synthetic nanoscale polymer that is highly regular in size and structure and well suited to pharmaceutical uses.”

Although they have three core development programs, the one to watch is the VivaGel® portfolio.  This drug family consists of topical gels for prevention of infection from HIV, genital herpes (HSV-2) and bacterial vaginosis.  They have diagnostic products on the market licensed to marketing partners Siemens Healthcare and Merck.  They have a separate operating company in the US called Dendritic Nanotechnologies (DNT), which trades in the Over the Counter (OTC) market.  If you only invest in stocks that you clearly understand, then this one mightn’t be right for you.  Here is their year over year price chart:

Pharmaxis Ltd (PXS) is a niche player targeting the research and development of new therapies for respiratory diseases.  They have four major products in their pipeline – Aridol for the management of asthma, Bronchitol for cystic fibrosis and chronic obstructive pulmonary disease (COPD), PXS25 for the treatment of lung fibrosis, and ASM8 for asthma.  Bronchitol has been approved for marketing in the European Union and recommended for inclusion in the PBS (Pharmaceutical Benefits Scheme) in Australia.  They are seeking approval for the drug in the US.  Aridol is already approved for sale in Australia, major European countries, South Korea and the United States.

With four other treatments in the pipeline and 15 patents to their credit, this is one to watch.  Here is their chart:

Phosphagenics Ltd (POH) is in both the US and Australian markets, with products focused on three segments – nutraceuticals, pharmaceuticals, and cosmeceuticals.  All their products make use of their innovative TPM delivery system, for which they hold multiple patents.  Basically what the system provides is a method for transdermal, or through the skin, delivery of the treatment.  The benefits of eliminating injections or ingested medicine can be significant.  They have a variety of cosmaceautical products already in the market with several pharmaceutical products in various stages of clinical testing.  Their neutraceuticals are traditional health and food supplements, marketed through partnership arrangements.  Here is their chart:

Vita Life Sciences (VSC) is primarily a provider of vitamins and health food supplements in Australia and Asia, including China, Malaysia, Thailand, Viet Nam, and Singapore.  There is no magic technology here, only a wide variety of products extending to meal replacements, sports nutrition, herbal remedies, suitable for men, women, and even children.  The company is debt free and well managed with a respectable operating margin of 6.9% and a Return on Equity of 14.3%.  Revenues increased in 2011 to $24.7 Million from $20.99 Million in 2010 and the 2011 NPAT of $1.2 Million represented a threefold increase over the normalised result for 2010.  Their share price chart reflects this solid performance:

Sigma Pharmaceuticals (SIP) showed the best share price appreciation of any of the ten companies in our table.  Here is their stellar chart:

Their 52 Week Low of $0.37 came exactly one year ago and they have trended upward ever since gaining about 60% year over year.  This is another company without a revolutionary technology.  They provide a broad portfolio of prescription drugs and over-the-counter medicines direct to pharmacies throughout Australia.  They also offer marketing assistance and value-added front-end products.  This is another well run company that responded to heavy discounting by international generic manufacturers by establishing an Embrace Loyalty Program, for their distributor members, offering discounts across a wide range of product in exchange for minimum purchase levels. 

Sigma reinvented its corporate strategy in the past few years and shareholders are now realising the benefits.  The fiscal year 2011 NPAT of $50.3 Million was a welcome change from the 2010 loss of $73.1 Million.  Total shareholder return for the year was 73.4%, all achieved in a dreadful year when consumer sentiment was falling and retail investors were jumping ship in record numbers. 

 Sigma proves there’s always a bull market somewhere.

 

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