4 Healthcare Stocks: How to Diversify Within the Industry

by: Holly Thompson
It’s quite a surprise that healthcare stocks have held up so well during the recent market correction. It has been quite some time since any healthcare stocks have been at the top of my list but it appears to be time to give some serious thought and research to this sector.
Accretive Health Inc. (AH) provides healthcare revenue cycle management services to hospitals and healthcare providers. The company caters to multi-hospital systems, community healthcare systems, academic medical centers, independent ambulatory clinics and physician practice groups.
Accretive reported results for first quarter 2011 that included net services revenue at $163.7 million, an increase of $37.8 million, or 30%, over the first quarter of 2010 and operating margin at $34.2 million, an increase of $10.5 million, or 45%, over the first quarter of 2010.
Mary Tolan, Accretive Health's co-founder and CEO, said, "We had a very productive first quarter and delivered results right in line with our expectations. Despite it being our seasonally slowest quarter, we experienced strong top-line growth, margin expansion and increasing profitability. These results are driven by the high level of value we deliver to our customers through both net revenue yield improvements and operating efficiencies. We continued to grow our revenue cycle management business by adding new customers and further penetrating our existing customer healthcare systems. We are seeing strong interest from existing customers in our shared services offering, further validating the strength of our customer partnerships.”
Consensus sees Accretive's sales growth accelerating for the next four quarters. EPS growth forecasts range from 43% to 150% over the next four quarters. Analyst Eric Coldwell of William Blair & Company raised his rating on the stock to "outperform" from "neutral." He expects Accretive to meet Wall Street expectations for 2011 and have an even better 2012.
Illumina Inc. (NASDAQ:ILMN) has developed a comprehensive line of products that address the scale of experimentation and the breadth of functional analysis required to achieve the goals of molecular medicine. The company offers solutions for SNP genotyping, copy number variation, DNA methylation studies, gene expression profiling, low-multiplex analysis of DNA, RNA and protein. Illumina’s products and services are used by a broad range of academic, government, pharmaceutical, biotechnology and other leading institutions around the globe.
First quarter 2011 results posted revenue of $282.5 million, a 47% increase over the $192.1 million reported in the first quarter of 2010 and non-GAAP net income of $50.3 million, or $0.35 per diluted share, compared to $26.6 million, or $0.21 per diluted share, for the first quarter of 2010.
Illumina issued $800 million principal amount of 0.25% convertible senior notes due 2016 that generated net proceeds of $785.6 million, of which $314.3 million were used to repurchase 4.9 million shares of common stock. On April 18, 2011, ILMN issued an additional $120 million principal amount of 0.25% convertible senior notes due 2016 pursuant to an over-allotment option, which generated additional net proceeds of $117.9 million.
For the full year, analysts see earnings climbing 42% in 2011 and 29% in 2012.
Endo Pharmaceuticals (NASDAQ:ENDP) operates as a specialty healthcare solutions company in three segments: branded pharmaceuticals, generics and devices and services. The branded pharmaceuticals segment offers various branded prescription products related to the treatment and management of pain. It also provides urology, endocrinology and oncology products. The generics segment comprises non-branded generic products related to pain and products for the pain management, urology, central nervous system disorder, immunosuppression, oncology and hypertension markets. The devices and services segment provides urological services, products and support systems to urologists, hospitals, surgery centers and clinics.
Total revenues during the first quarter of 2011 increased 54% to $560 million, compared with $364 million in the same quarter of 2010. Net income was $56 million, compared with $60 million in the comparable 2010 period.
Stifel Nicolaus notes, over the past year, Endo has actively moved to diversify its portfolio from its historical pain focus, with flagship product Lidoderm, into the more specialized and procedurally-based areas of urology, endocrinology and oncology. This diversification has added over $1 billion in revenues with longevity, comprised of generic drugs, diagnostics, devices and services.
Catalyst Health Solutions (NASDAQ:CHSI) operates as a pharmacy benefit management company that provides its clients with plan designs, clinical programs, physician orientation programs and member education through an electronic point-of-sale system. The company provides its clients access to a contracted national network of approximately 63,000 pharmacies and serves self-insured employers, including state and local governments, managed care organizations, third-party administrators, unions and individuals.
Catalyst reported financial results for the first quarter ended March 31, 2011 where quarterly revenue increased by $289.4 million, or 34.8%, to $1.1 billion from $832.3 million in the prior year's comparable quarter. Gross profit for the first quarter increased $11.0 million to $61.6 million, compared to $50.6 million in the first quarter of the prior year, a 21.6% increase.
"We are pleased with the company's financial performance," stated David T. Blair, CEO of Catalyst. "The company delivered meaningful earnings growth while executing on significant strategic initiatives. Most notably, during the quarter the company announced an agreement to acquire Walgreens' (WAG) pharmacy benefit management (PBM) subsidiary, Walgreens Health Initiatives, Inc. (WHI)."
Current reports show the performance of the pharmaceuticals, biotechnology and life sciences sector of the healthcare industry is up 8.78% this year while the healthcare equipment and services area is up 12.63%. This is definitely a good time to take a second look at healthcare.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AH over the next 72 hours.