As concerns over the macroeconomy loom, investors are rightfully eyeing the healthcare sector as a hedge. In particular, Johnson & Johnson (NYSE:JNJ) made headlines recently when a groundbreaking study was released showing Xarelto's promise for new applications. The blood-thinning drug has already been FDA approved for stroke prevention in atrial fibrillation patients, but now is likely to win approval for uses in patients with acute coronary syndrome.
In the study, 15,500 patients of this syndrome were given either 2.5 milligrams or 5 milligrams of the drug (or a placebo) approximately twice daily in a 13-month period. The study revealed a decreased risk of death and other heart-related issues for sufferers, but concerns over bleeding and minimal marginal effectiveness of the higher dose most likely will limit approval to a 2.5 milligram product.
As groundbreaking as this is, it has not ended analyst woes over diversification. Even still, the firm is an attractive defensive play as it trades at 12.4x forward earnings while offering a dividend yield of 3.51%. Consensus estimates for EPS are that it will grow by 4.4% to $4.97 and then by 5.4% and 7.4% in the following two years.
Of the 17 revisions to estimates, 14 have gone up and shares are now rated a "buy." Plavix, warfarin, and Xarelto are all strong heart treatments, but the significant competition between the providers results in limited upside.
This is why healthcare investors should turn their attention to companies that have a long-term sustainable advantage and better risk asymmetry. In particular, I recommend InVivo Therapeutics (NASDAQ:NVIV), which innovates in the absence of competition. InVivo is a medical device company that commercializes novel technology for treating spinal cord injury and has over 100 patents.
The company recently submitted an IDE application to the FDA for a proprietary biopolymer scaffolding device that prevents secondary injury. Notably, approximately 90% of SCI paralyzation is due to the bleeding and inflammation that follows the initial injury. By patenting much of its business (including the manufacturing process), InVivo's upside is both tremendous and safe.
While the barriers to entry will preclude competition, the low time to commercialization will drive free cash flow. The biodegradable device is in the body for 2 months and dissolves through urination. It has proven successful in rodent and non-human primate studies and, given efficacy standards, will likely win approval after human studies. All of the monkeys treated with the device were up and walking within about 3 weeks. (Click here for an exciting look at this story.)
And just Monday, Geron Corporation (NASDAQ:GERN) announced that it will be exiting its stem cell programs and seeking partners. The GRNOPC1 trial for SCI will come to a close, thus putting InVivo in an even stronger position to penetrate the market. This decision followed a change in management that was likely uncomfortable with the cost curve and timelines.
With years of research, several published studies, and a substantial amount of patents, InVivo is, in my view, the only medical device company that can viably take on the $17B potential SCI market. In just the United States, approximately 1,275,000 individuals suffer from paralysis as a result of SCI. As it makes its leap forward, InVivo is backed by an impressive management and lab team. In fact, Ed Wirth, who was the former medical director of regenerative medicine at Geron, liked so much of what he saw in InVivo that he now is the medical device company's chief science officer.
Going forward, I am bullish on the healthcare sector as a whole given the inelastic demand for medical products. But competition in cross-over fields result in sustainability issues for many producers. In this challenging environment, investors should not just be content with defensive plays - the most lucrative opportunities can be found in companies with valuable patents, limited to zero competition, and favorable risk/reward.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NVIV.OB over the next 72 hours.