Four healthcare stocks have made news of the last several weeks. The following table lists the four with price appreciation and balance sheet information. Four of the five are still in the start-up stages when cash and debt often prove to be key to the company’s ability to absorb the costs of producing revenue generating products.
Ramsay Health Care Ltd (RHC) has rewarded shareholders with a 500% rise in share price over ten years along with an average annual rate of total shareholder return (share price appreciation plus dividends) of 22.8%. No other blue chip ASX healthcare stock can match that – not even perennial favorite CSL Limited (CSL) with 18.7% total return. The following chart compares the price movement of the two ASX giants.
As you can see the stock price dipped beginning in August of 2016, dropping from a 52-week high of $83.16 to the current $70.19, a decline of 15.6%. The first news that started the decline came not from Ramsay, but from smaller rival Healthscope Limited (HSO). In mid-October Healthscope shocked the market with a warning of lower than expected revenue growth as well as flat earnings for the upcoming quarter. The share price dropped close to 30% intraday, dragging the price of Ramsay shares along for the ride. In a classic example of market tendency to shoot first and ask questions later, many investors ignored the fact Healthscope derives more than 80% of its revenues from Australia while with its greater international reach, Ramsay’s Australian revenues account for only 50% of its total.
High growth stocks like Ramsay can experience price drops on news that investors perceive as problematic for future growth. On 23 February Ramsay reported solid Half Year Financial Results – 3.5% revenue increase and 12.8% rise in profit along with upward revisions in guidance. Investors ignored the positive fundamentals and reacted to the news included in the announcement that Ramsay’s CEO was retiring, with no information on a successor.
In addition, two members of Ramsay’s Board of Directors sold substantial portions of their holdings, although both maintained more shares than they sold. Some investors are willing to accept the rationale that insiders need cash just like everyone else; while others in this case focused more on the fact that two directors chose to sell at the same time.
Long term Ramsay investors who ignored the news not related to business fundamentals lost the opportunity to increase their holdings at lower prices.
Mesoblast Limited (MSB) has a proprietary human-cell based technology it is using to develop treatments for “under-served” conditions including cardiac diseases and orthopedic disorders of the spine among others. The company bills itself as a “world leader in developing innovative cellular medicines.”
The company’s product portfolio of cell-based products features five programs currently in Phase 3 trials or ready to begin trials; and four in Phase 2. The global investment community elevated many biotechnology firms involved in cell-based regenerative medicine to market darling status, with Mesoblast among them. The company trades in the US as well and investors there were equally enthusiastic.
On 21 October of 2011 Mesoblast hit an all-time high on the ASX -$9.67, dropping a heart-stopping 76% to its current level. On the same day in the US Mesoblast (NASDAQ: MESO) hit $50.20 and now trades at $9.01, an 82% decline.
The stock price opened 2017 trading around $1.47 and rallied on the welcome news one of its drugs received “fast track status from the US FDA (Food and Drug Administration). Fast track speeds up the FDA approval process for drugs targeting “unmet” conditions. However, the bounce stopped and stuttered on the news the company was yet again raising money with a capital raise. The placement was for institutional investors at a price of $2.00 per share when the stock had reached $2.39, apparently displeasing the rest of the investing community. Mesoblast may have a promising technology and promising markets, but its development costs and operating costs are borderline astronomical, testing the patience of even the most ardent investors.
Another regenerative medicine company, Orthocell Ltd (OCC) made the news with the announcement of an additional patent for its CelGro treatment for regeneration of soft tissue – tendon, nerve, cartilage and bone – to add to its existing patents in Singapore, China, the US, Australia, and New Zealand. The company is an ASX newcomer, listing in August of 2014 with an opening price of $0.375 following an oversubscribed IPO. The share price more than doubled within a year, hitting $0.80 by 14 August of 2015.
The company has two other regenerative products, Ortho-ATI® for tendon repair and Ortho-ACI® for cartilage repair. Both use healthy cells from the patient and are injected into damaged areas right in the physician’s office and are already approved and in use here in Australia.
Given that only 300 Aussie patients have been treated to date, Orthocell exemplifies the ubiquitous problem faced by start-up bio-techs. Development is expensive and in a cruel twist gets more expensive as products near commercialisation status. Marketing costs go up; employees are added; and on and on. Orthocell’s declining share price may have begun because of the company’s Full Year 2015 Financial Results which showed a 75% increase in expenses with revenue generation nowhere near on the horizon. This occurred following a massive upward spike on news from The Journal of Tissue Engineering and Regenerative Medicine highlighting positive results from a treatment similar to that being developed by Orthocell. The share price movement chart for Orthocell since it came on the ASX stands as a testament to the roller-coaster ride bio-tech startups sometimes endure, with wild stock price swings generally in response to news. If you believe in Orthocell’s viability, watching the news opens the door to buying on the dips. Here is the chart.
Medlab Clinical Limited (MDC) is formulating bio-therapeutic treatments for chronic diseases such as obesity, depression, kidney disease, age-related muscle loss, and chronic pain. Unlike pharmaceutics that rely on chemical compounds, bio-therapeutics use natural products and cells.
Medlab also has a patented medicine delivery system, NanoCelle™. This system allows superior absorption of medicine into the bloodstream with medicine broken down into sub-micron sized particles and delivered through a mouth spray.
The company has obesity and depression treatments in Phase I clinical trials. On 27 March Medlab announced it had received approval to proceed with Phase 2A trials for its depression treatment, NRGBiotic.
Medlab debuted on the ASX on 14 July of 2015, opening at $0.205. Surprisingly, investors at that time yawned at the fact the company was seeking approval from the NSW government to start clinical trials for pain management combining high yield cannabis with its patented delivery system. Shares closed at $0.20 and remained relatively flat until more news about the cannabis trial, coupled with changing regulations on medical marijuana, was announced to the market.
In July of 2016 the company announced a capital raise for the primary purpose of funding the cannabis pain treatment clinical trials. In August of 2016 Medlab announced an agreement with a Canadian product to supply the cannabis. In November, the company announced preparations to begin clinical trials of its cannabis pain treatment, pending government approvals. On 22 February of 2017 the company announced the trials would begin upon shipment clearance from the Canadian government.
A two-year share price movement chart for MDC shows the impact of the news announcements related to the cannabis trials.