Dr. Ashim Anand Puts Buy Recommendations On 5 Healthcare Diagnostics Companies
January 25, 2010 - The Wall Street Transcript has just published Medical Research, Diagnostic Substances, Life Science Tools Report offering a timely review of the Health Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Dr. Ashim Anand, Ph.D., is a diagnostics Analyst at Natixis Bleichroeder who exclusively focuses on this sector. He has worked in biotechnology and medical devices equity research both on the buy side and the sell side. Dr. Anand's medical background includes a stint as a scientist at Harvard Medical School, the founding of a private biotech firm, several consulting projects with large pharmaceutical companies, sales experience at Ranbaxy Pharmaceuticals and several peer-reviewed papers published in biomedical journals.
He received an MBA in finance and accounting from Columbia Business School, a Ph.D. in molecular biology and biochemistry from UMDNJ/Rutgers. He also has a master's degree in biotechnology and a bachelor's degree in pharmacy from Sagar University.
TWST: What company do you like right now within the sector and why?
Dr. Anand: These secular trends have different meanings for different companies, and the companies that I will tell you that I like, that would have something to do with the secular trends. But it will also have to do a lot with what management is doing and what's their evaluation. So right now I have a buy rating on Inverness (IMA), Quidel (QDEL), Celera (CRA), Gen-Probe (GPRO), and Myriad Genetics (MYGN).
Inverness and Quidel are both point-of-care. Both of these companies benefit from that secular trend toward point-of-care diagnostics. IMA has done really well over last year. We initiated in November 2008, when it was a $15 stock, now it's like $44. But that has partly to do with the secular trend and partly to do with the fact that 2008 was extremely bad year for them. The Street had gotten very negative in terms of their acquisition strategy. However, now the company stands alone in terms of delivering, meeting or beating Street estimates consistently over 2009. Some of the objections that the Street had in terms of their strategy are moot now. Inverness could trade at a premium, but then it is an acquisitive company. A dilutive acquisition could be a challenge.
Quidel is a well-understood company which gets outsize benefit from influenza, and their gross margins move along with the amount of influenza sales they do. And lately there has been a lot of influenza sales. But this company generally trades at a premium to its peers. However, in the last two months or so, as investors started thinking that the benefit from swine flu is over, there was a big fall off. That made the stock extremely cheap in comparison to its peers, like 25% cheaper or something. The valuation has become attractive on this company, even though the swine flu has gone away. Recently they acquired a company, Diagnostic HYBRIDS, which would diversify their revenue base away from influenza to cater for the variability in influenza. So that's Quidel.
Celera had a tough year last year, but the last two months or so it has recovered beautifully. The challenge last year was that some of its services revenues, the third-party payers, were not paying up. So now that situation has been improving. The story with Celera is that it has a lot of intellectual property. This is the company, which sequenced the human genome, in fact actually they beat the national effort to sequence the human genome. They have a lot of intellectual property, and they are leveraging it in terms of developing new tests. And they are one of the leaders in the exciting field of personalized medicine. That essentially is sort of the story with Celera, they have like $4 million or so in cash, no debt. It's sort of a value investment from that perspective; now it has recovered. But if they are able to deliver on improvements in terms of getting paid for the tests, then the stock will do even better, so that's why I still have a buy on them.
Then Gen-Probe is a leader in molecular diagnostics, which has two businesses related to molecular diagnostics, but one is essentially molecular diagnostics - they sell instruments and reagents to labs for doing molecular tests. Along with that they are involved in blood screening through a partnership with Novartis (NVS). The blood banking business had slowed down and there are a variety of reasons. Some of the reasons were actually related to what we talked about in the macro economy, like the customers having cash problems so they are not buying instruments and not stocking up on reagents. That and the fact that Gen-Probe goes through Novartis in terms of selling the blood screening products. Because Novartis is a big pharmaceutical company, blood screening is sort of a side business. So it doesn't move their needle too much if this business doesn't do too well. But then for Gen-Probe, it is a very important business, so that has led to pull back on the stock. But it's a blue-chip company, so a lot of people have taken now the opportunity to buy it when the stock was cheap. And most importantly, Gen-Probe is getting into cancer molecular diagnostics. And that we believe is one of the most lucrative markets.
Then coming to Myriad Genetics, Myriad Genetics was one of those biotech-like diagnostic companies. Last year, they spun off Myriad Pharmaceuticals, with which the biotech part went away, and now they are 100% diagnostic company. They are a different animal in diagnostic companies in that their tests tell you about the risk of developing a disease. It tells that at the molecular level, the disease process could start. A disease at the molecular level could then filter through to the cellular level, and the physiological level and the body level. Gen-Probe's product could take your blood and tell look, yeah, you are developing this disease. The most famous test is the BRACAnalysis, and the company generates most of their revenues through BRACAnalysis. They have like eight or so more tests, but essentially what has happened with the stock is that essentially due to the macro economy and some of the points which we have already discussed - people losing jobs and people who have not lost jobs who are thinking, "I don't want to pay a $50 or $100 copay" they defer a test - those things have led to decrease in the volume of BRACAnalysis tests. And that has led to Myriad Genetics actually not being able to deliver sequential revenue growth. That is what the Street has come to expect.
They still grow much faster than anybody else, but as you know, in the Wall Street community, if you are up sequentially every quarter for last five years, they take it as a rule that you would. And the day you don't, people are harsh on you, and they think the sky is falling. There are challenges, but still you have to see the yearly growth rate is still pretty good. So that essentially has made the stock extremely cheap, and suddenly Myriad finds itself as a stock which is not liked. But that doesn't change the fact that they are in the field of cancer, which, as I said before in terms of when I was talking about Gen-Probe, that cancer molecular diagnostics is one of the most attractive markets partly because we are losing the battle on cancer, and diagnostics can help in terms of actually catching the cancer young and probably reducing the costs of taking care of a person who actually catches cancer. The company's products are unique and their margins are extremely high - one of the highest in the whole health care industry, irrespective of biotech or pharma companies or med device companies. So that's why I have a buy on them too.
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