Are These 10 Sick Healthcare Companies Terminally Ill?

by: Alan Brochstein, CFA

Healthcare has come back to life, leading all other sectors through 7/5 at almost a 14% YTD return. Despite the resurgence in the sector, investing in Healthcare hasn't been a universal ticket to wealth. Here are 10 names above $500mm market cap that are down more than 20% YTD:

I am somewhat familiar with several of these, as Amedisys (NASDAQ:AMED) and Savient (NASDAQ:SVNT) are on my watchlist. I have done some work on Geron (NASDAQ:GERN) for a client recently as well.

Let's treat this like triage, and start with the worst. Universal American (NYSE:UAM) surged into year-end when it sold its Medicare Prescription Drug business to CVS Caremark (NYSE:CVS). Shareholders received a cash distribution after the deal closed. So, this stock is actually up on the year.

Nektar Therapeutics (NASDAQ:NKTR) had no such luck. The stock peaked last October near 16 and is now trading near the lows of the past two years. The company announced in December that it was going to take NKTR-102 into a Phase 3 trial without a partner and ended up selling $220mm of stock in January. The optics look pretty bad, as sales plunged in the most recent quarter due to the scheduled end of up-front payments from a collaboration with Astra-Zeneca (AZN).. From what I understand, the company does have good technology, but this one doesn't look like it's going to recover in the near-term. With that said, it's not going away. While the table above indicates net debt, the company, with $496mm in "short-term investments" actually has almost all its equity in cash (about $2 per share).

Medassets (NASDAQ:MDAS), which helps hospitals and healthcare systems confront financial pressure, has been in a downtrend for a year now. Most recently, the stock plunged when its reported its Q4 in February, with analysts reducing estimates for 2011 by about 15% (though they are still expected to grow strongly). The company executed a massive acquisition last year (Broadlane), taking on a lot of debt. I don't know this story that well, but I am encouraged by teh 20% insider ownership. This looks like a merger that overpromised and is underdelivering - probably worth a closer look.

Savient (SVNT) is one I know well. Unfortunately, I added it prematurely to my Top 20 Model Portfolio earlier this year. I was and remain excited about their new CEO, who joined from Eli Lilly (NYSE:LLY), where he had remained after it bought Imclone (he was the CEO). He has used his deep industry experience (formerly ran JNJ's biotech) to beef up management, which is focused on the launch of KRYSTEXXA, which treats gout. The problem for the company has been a slow launch due to the lack of a billing code, but this should be resolved later this year. The CEO took a lot of stock and has a special incentive to get the company sold. I think this one works well in 2012.

Community Health (NYSE:CYH) ran into big trouble when Tenet Health (NYSE:THC) accused it of illegal billing in an attempt to ward off a hostile bid. I don't have a lot of insight into the ultimate resolution here, but my understanding is that there are good explanations for the discrepancies that THC pointed out. With so much debt, though, the situation looks a bit risky.

Micromet (NASDAQ:MITI), which has 10% insider ownership, is focused on cancer. The stock was crushed from its IPO in 2003 but was showing some bottoming signs through the end of 2010. In January, the stock began a slide from 8.5 to as low as 4.75. I am not sure what happened reviewing the news. The company did sell $70mm in stock in November. The company has $2 in cash per share, but it has been a serial diluter over the years. Since going public, the sharecount has increased by over three-fold and more than doubling in the past three years.

Geron is a perennial loser from what I can gather. They booted the CEO and founder recently, but they handed it over to the CFO. I was negative then and remain so now. This is a company with a long record of all sorts of exciting things that don't work out, and I expect little in terms of their new efforts to run the business with a focus on capital. The company has doubled its sharecount in the past five years.

Gentiva (NASDAQ:GTIV) provides home healthcare services, a great industry in my view but one that has some reimbursement issues with which it is contending. I don't follow GTIV as closely as AMED, but note that they have substantially more debt. The stock was doing well until they reported Q1 results in early May. The company reaffirmed guidance. I remember 7 years ago listening to the CEO brag about how little Medicare exposure the company had. That is no longer the case, with 69% growth in Medicare in the past year as the company has gotten deeper into hospice care. Overall, Medicare accounts for almost 90% of sales now. With so much debt, I will pass.

Targacept (TRGT) was near an all-time high in March, but it has declined by almost 1/3. I am not familiar with the company - here is a description from their 10-K:

We are a biopharmaceutical company engaged in the design, discovery and development of novel NNR Therapeutics for the treatment of diseases and disorders of the nervous system. Our NNR Therapeutics selectively target neuronal nicotinic receptors, which we refer to as NNRs. NNRs are found on nerve cells throughout the nervous system and serve as key regulators of nervous system activity.

We trace our scientific lineage to a research program initiated by R.J. Reynolds Tobacco Company in 1982 to study the activity and effects of nicotine, a compound that interacts non-selectively with all nicotinic receptors. Based on years of focused research in the NNR area, we believe that compounds that interact selectively with specific NNR subtypes have the potential to achieve positive medical effects by modulating their activity. We have built an extensive patent estate covering the structure or therapeutic use of small molecules designed to regulate nervous system activity by selectively affecting specific NNR subtypes.

We have multiple clinical-stage product candidates and preclinical programs in areas in which we believe there are significant medical need and commercial potential, as well as proprietary drug discovery technologies. We have entered into two significant collaborations with the global pharmaceutical company AstraZeneca to provide expertise and resources to assist in the global development and potential commercialization of many of our product candidates. One is a collaboration and license agreement focused on TC-5214 as a treatment for major depressive disorder, and we refer to that agreement in this annual report as our "TC-5214 agreement with AstraZeneca." The other is a collaborative research and license agreement focused in cognitive disorders, and we refer to that agreement in this annual report as our "cognitive disorders agreement with AstraZeneca"

Unlike some of the other biotechs on this list, these guys, who have a major VC investor, haven't been serial diluters. With AstraZeneca (NYSE:AZN) walking away from a project, though, the company was forced to sell over 10% of the company in an offering last quarter. The company was finally profitable last year, but the work on the ADHD drug will put them back into the red again. Sales are projected to rise double-digit.

Amedisys (AMED) is a favorite of the shorts. I actually like the company and believe that the crowded short position will likely lose. Like GTIV, the company provides home healthcare and hospice services. The company, which has struggled with reimbursement lately, has been reducing debt and cutting back on its acquisitions. I wouldn't be surprised to see private equity ultimately take out this stock.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SVNT over the next 72 hours.

Additional disclosure: Long SVNT in a model at Invest By Model.