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The ASX Healthcare Index (XHJ) continues to outperform, up 20% year over year compared to a drop of about 3% for the All Ordinaries Index (XAO).  Despite the benefits associated with ageing populations, stocks in this sector can be notoriously volatile, such is the case with ASX biotech stock Mesoblast Limited (MSB). 

Mesoblast attracted wide interest because of its potential to make advances in a “next big thing” arena – regenerative medicine.  The idea is to develop treatment modalities derived from the biology of the human body, such as stem cells and other cells.  The MSB share price exploded on “promise” – rising from its opening day close in 2004 of $0.50 to an all-time high of $9.99 in October 2011.  Since then the stock has been falling out of favor as investors grow tired of waiting for promise to translate into performance.  Here is a price movement chart for MSB since it began trading on the ASX.

Mesoblast is now trading below its Book Value per Share.  Is it a bargain?  Are there other ASX Healthcare stocks trading below book value with more potential?

Primary Healthcare (PRY) is one of the Top Ten Shorted stocks on the ASX and like Mesoblast, it is trading below its book value.  We also found two little known micro-cap biotech’s with robust product pipelines trading below book value.  The following table lists all four of these potential bargain stocks.

So how can a stock with an Enterprise Value more than $1 billion greater than its Market Cap remain on the Top Ten Short List?  Enterprise Value is considered a better measure of what a company is worth since it includes a company’s cash, debt, and other security interests in its calculation.  

PRY’s Price to Book Ratio (P/B) is 0.67, which translates to $4.74 per share, close to 32% higher than the current share price.  The trailing twelve month (TTM) P/E is 12.17.  The current P/E for the Healthcare Sector is 21.44 with the average P/B for the sector at 2.39.

Primary operates in four divisions, three of which some analysts view as high risk due to potential changes in regulations and payment schemes. The presumed “at risk” operations include the following:

The company operates more than 80 Medical Centres across Australia where a wide variety of private health care providers base their practices.
Primary operates close to 2,000 collection centres where tissue and blood samples are sent for processing in the company’s 98 pathology labs.
The company has close to 200 Diagnostic Imaging Sites.
Investor concerns for these divisions are based on potential changes in Medicare funding levels as well as changes in approved payments from private health insurers like Medibank.  

The two operating sectors less affected by regulatory changes are:

Health Technology operations, which provide both clinical and practice management software for healthcare professionals; and
Transport Health Fund, an insurance provider acquired by Primary Healthcare in November of 2014.
Back in March this year, rumour had it that private equity firms were casting a covetous eye on Primary, the idea being that the new CEO would start selling “non-core” assets to re-invest in the core businesses.  In June 2015 the company did announce it was selling a recently acquired office complex in Sydney and the deal was completed on 13 November.  

The company’s Full Year 2015 Financial Results released on 12 August were a mixed bag at best, confused by the restatement of FY 2014 results and one-offs.  Investors were not impressed as the share price continued to decline following the release.  Here is a six month chart for Primary.

Despite the challenges, analysts are still largely bullish on the stock.  The consensus rating is Outperform, with 3 analysts rating the stock a Buy, 4 at Outperform, 4 at Hold, and 3 at Underperform.

Mesoblast Limited (MSB) is awaiting commercialisation of one of its several treatments in trials. In FY 2013 the company reported a loss of $61.7 million, which almost doubled to a loss of $119.4 million in FY 2015.  At the end of October the company went into a trading halt pending the announcement of a “potential international capital raise.”  That turned out to be a listing on the US based NASDAQ GS.  Mesoblast was already trading in the US on the OTC (Over the Counter) but the move to NASDAQ would allow biotech funds to invest in the company.

The share price was crushed when investors learned Mesoblast would be getting far less for its shares – US$8 per share – than it had hoped – US$12 per share.  The share price dropped from $3.41 to $2.10 – a 37% fall in one day – and has been declining ever since.  Mesoblast may have been the victim of very poor timing as the US Biotech Sector was crushed in September and has only recovered slightly.  Here is a price movement chart for the iShares Biotech ETF.

The concern in the US is similar to concerns raised here – the possibility of governmental regulators stepping in to curb the very high cost of drug prices and other treatments.

Mesoblast has a proprietary cell-based technology and currently has five treatments in various stages of Phase 3 approval and four in Phase 2.  One treatment for Graft versus Host Disease (GvHD) has been approved in Japan through its development partner there, JCR Pharmaceuticals Ltd.  GvHD is a condition that can occur after a bone marrow or stem cell transplant.  

The diseases that could be potentially treated through MSB’s products range from chronic heart failure to rheumatoid arthritis to Crohn’s disease.  If you are an investor comfortable with judging stocks at least in part by the “company they keep”, Mesoblast has two very impressive partners, in addition to Japan’s JCR. 

The first is Israeli based Teva Pharmaceuticals.  Teva is using a Mesoblast product candidate in a Phase 3 clinical program for patients with chronic heart failure.  

The second is US based Celgene, a world leader in oncology and immunology.  Celgene took a 4.5% stake in MSB at a cost of $45 million.  In addition, Mesoblast granted Celgene a six-month right of first refusal on Mesoblast’s stem-cell product candidates for some oncological conditions as well as inflammatory bowel disease.

Phosphogenics Limited (POH) offers products for pharmaceutical use, consumer cosmetics, and animal health. The common thread in its three operating divisions is the company’s patented delivery system, TPM® (Targeted Penetration Matrix).  This is a transdermal (through the skin) delivery system with a Vitamin E base that can be used to deliver drugs like morphine, insulin, and lidocaine and other compounds.

In 2011 the company introduced its first consumer product line, BioElixia®, for skin care and beauty treatment. The company now has 9 pain treatments in early phases of clinical approval with one treatment already commercialized.

That treatment is TPM®/Diclofenac gel and it is now available in India for treatment of osteoarthritis and rheumatoid arthritis.  Back in 2011 Phosphagenics entered into a licensing agreement with Themis Medicare Pvt of India to use TPM® drug delivery technology with the gel.  Global pharmaceutical giant Novartis then entered into a sub-licensing agreement with Themis in 2013.  In early 2014 both Themis and Novartis began offering their own versions of the treatment; Voveran® TPM gel from Novartis, and Instanac® TPM gel from Themis.

Phosphagenics is aggressively pursuing opportunities to expand the use of the TPM® technology with its latest agreement coming with a German partner, tesa Labtec GmbH, for the development of the TPM®/Oxymorphone patch, a treatment for chronic pain.  The company is also active in its efforts in animal health.  Although Phosphagenics remains unprofitable, Half Year 2015 Results did show a 119% increase in revenue, rising from $459,000 to $978,000.

Phosphagenics made the news back in November 2014 when a former executive pleaded guilty to defrauding Phosphagenics of about $4 million over nine years.  Interestingly enough, the final share in our table, Invion Limited (IVX), had its own incident in 2014 when Invion won a case against two former board members for “unjust” termination payments.

Despite its tiny size and sub-penny stock status, Invion does have three drug treatments in four Phase 2 FDA clinical trials.  The company focuses on treating inflammatory diseases, such as asthma, chronic bronchitis, and lupus.  The key clinical trial the company sees as crucial to its broader market strategy is a smoking cessation study.  In conjunction with the release of positive results from the smoking study, Invion announced a capital raise through an investor share purchase plan.  Invion company raised $1 million from a private US investor back in June.  In a research report from Morgans Research on the company website, the analyst expressed the opinion the results of the smoking cessation study were “very positive news for IVX and importantly validates the technology and strategy.”