H&Q Life Sciences: A Compelling Healthcare CEF

Includes: HQH, HQL
by: H.S. Ayoub

H&Q Life Sciences Investors (NYSE:HQL) is not actually a stock, but trades like one. HQL is a close-ended fund managed by Hambrecht and Quist Capital Management LLC, and trades on the Amex just like a stock. What really gets us excited about HQL is that it invests in both public and private companies, large and small.

An investor of HQL does not only hold a broad diversified position in the biomedical industry, but also carries financial vehicles not commonly available to small investors. HQL invests in convertible securities and warrants in addition to common stocks. As of June 2006, about 19% of its assets were made up of non-common stocks.

HQL, initiated in 1992, is the younger sibling of H&Q Healthcare Investors (NYSE:HQH), which began trading back in 1987. According to the company’s website HQH holds a broader position in the healthcare industry, while HQL focuses more on exciting new biotechnology startups, although we fail to differentiate between the two when looking at their holdings.

So why are we recommending HQL right now? The fund just recently completed a public 1 to 3 rights offering that netted more than $70 million in cash. HQL is excited to take advantage of what it believes is a great time to find bargains in the biotechnology and medical industry, and according to the prospectus for the filing it plans on investing in those bargains. The subscription price of the filing was $12.82 a share. Almost immediately, the Chief Executive Officer purchased more than $20,000 worth of stock at the same price.

While all biotech indices, including the NASDAQ Biotech Index [NBI], saw gains over the last few weeks, HQL has lost ground, dropping down near the rights offering price of $12.82. The price closed on Monday at $13.67 a share.

Another reason for investing in HQL is the dividend. Let us repeat that last sentence just in case you missed it; a biotech investment that pays dividend! The fund pays out 2% of assets in dividend on a quarterly basis. The last distribution paid out to investors was $0.29 a share.

If a sound, broad, and exclusive investment in the biotechnology and medical industry is hoped for, HQL is not only the safest bet, it is the only such investment. And at $13.67 a share, we have no hesitation in recommending it.

The following are some highlights of HQL’s holdings as of June 2006:

Common Stocks and Warrants
Biopharmaceuticals 26.3%
Drug Delivery 2.5%
Drug Discovery Technologies 5.3%
Emerging Biopharmaceuticals 17.8%
Generic Pharmaceuticals 4.3%
Healthcare Services 4.5%
Medical Devices and Diagnostics 15.2%

Largest Holdings (Common Stocks)
Gilead Sciences (NASDAQ:GILD)
Conor Medsystems (CONR)
IDEXX Laboratories (NASDAQ:IDXX)
Cubist Pharmaceuticals (CBST)
Theravance (THRX)
Lexicon Genetics (OTCPK:LEXG)
Genzyme Corp (GENZ)
United Therapeutics (NASDAQ:UTHR)
Exelixis (NASDAQ:EXEL)
Epix Pharmaceuticals (NASDAQ:EPIX)

Largest Convertible Securities (private companies)
Concentric Medical
PHT Corp.

Disclosure: The author has no position in HQH or HQL

HQL 1-yr chart:

HQL Investment Chart