Top Buy and Sell Ideas Based on Healthcare Sector's Q2 Losers

by: GuruFundPicks
The health care sector index (($XLV)) was up about seven percent for the quarter, while the S&P 500 was down half a percent. Of the approximately 600 stocks in the healthcare sector, 58 stocks trading above $1 at closing on June 30th went down more than 25% during the quarter (see Table below). These 58 stocks were analyzed to determine if they would drop more in price, or if they would reverse their losses going forward. As would be expected, most of the biggest movers in the list are small-cap, low-priced, mostly biotech companies. The following are the best buy and sell ideas based on that analysis.
Sell Cell Therapeutics Inc. (CTIC): CTIC is a biopharmaceutical company, engaged in the development of oncology or cancer drugs. The company is a classic case of over-promise and under-deliver. One only needs to look at the long-term chart to realize this, as the stock has only gone down since peaking in mid-2000 at a split adjusted price of almost $18,000 versus current prices under $2. Along the way down, management and the stock have disappointed legions of believers, and it is hard to have faith that they will deliver this time around. CTIC is heavily dependent on the outcome of its lead candidate, pixantrone, that is under development for the treatment of hematological malignancies and solid tumors. Even if pixantrone is approved this time around, it faces tough competition from established products. Furthermore, the company has a liquidity crisis as it is burning through cash and has only enough to last until the September quarter, which probably means another round of dilution for existing shareholders.
Buy Orexigen Therapeutics (OREX): OREX is best known for its Contrave drug that is under development for the treatment of obesity. The stock has been under pressure lately after FDA’s Division of Metabolic and Endocrinologic Products (DMEP) recently advised OREX that a pre-approval larger cardiovascular outcomes trial is needed, and that it would not consider approving Contrave for a narrowed population without first reviewing data from a cardiovascular outcomes trial. Contrave is generally considered to be the front-runner among the anti-obesity drugs, including Arena Pharmaceuticals’ (ARNA) Lorcaserin and Vivus’ (VVUS) Qnexa. However, the uncertainty surrounding the cardiovascular trials has put downward pressure on the stock. Meanwhile, the company has appealed the DMEP decision through a formal dispute resolution process. It is putting a hold on all U.S. clinical development for Contrave, and is exploring international opportunities for commercializing Contrave. While it is difficult to determine the ‘value’ implications of its actions going forward, we do know that the company has over $76 million or $1.58 per share in cash and cash equivalents, just below its $1.64 current trading price, and that the first company to develop an anti-obesity drug will reap a multi-billion dollar sales opportunity. We believe current prices maybe a good point for the not-so-risk-averse investor to build a small option-like position in the company, while awaiting results of pending FDA decisions. The company’s large cash position should provide some protection to the downside in the short-term, while the company explores value-enhancing opportunities going forward.
Buy Community Health System (CYH): CYH trades at a forward P/E of 7, at the bottom of its historic trading range. The stock fell almost 50% in the second week of April, when Tenet Healthcare (NYSE:THC) filed a lawsuit against CYH related to its alleged practice of systematically admitting-- rather than observing-- patients in CYH hospital for financial rather than clinical purposes. This was after CYH launched a hostile bid to acquire THC in December last year. We believe that at $25, most of the downside resulting from even an unfavorable ruling from the lawsuit has already been factored into the stock, and we would be buyers here. Furthermore, of the 22 analysts covering the stock, eight rate it a buy / strong buy, thirteen rate it hold, and only one rates it as a sell.
Other Ideas: Some other high-profile losers in the list include Savient Pharmaceuticals (SVNT), a developer of a treatment to promote weight gain following involuntary weight loss related to disease or medical condition; RXI Pharmaceuticals (RXII), a developer of therapeutics based on RNA interference to treat inflammatory and metabolic diseases and cancer; Delcath Systems Inc. (DCTH), a developer of a system that administers chemotherapy and other therapeutic agents directly to tumors in the liver; and Prana Biotechnology (PRAN), an Australian developer of therapeutic drugs to treat underlying causes of age-related degeneration of the brain and eye.
All four are development-stage healthcare products companies trading near their lows for the year. Of the four, SVNT is the only one owned by high alpha or guru funds that hold $30 million of the company, including $23 million bought in the March quarter by Columbia Wanger Asset Management LLC. RXII and DCTH are favored by analysts; of the five analysts that cover DCTH, four rate it a strong buy and one a buy; and of the three analysts that cover RXII, one rates it a strong buy and two rate it at a buy.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.