Healthcare Clouds: Where Are the Silver Linings?

Posted On March 31, 2011 | by AllenCaron

Late last week, the California State Controller, John Chiang, wrote a letter to a drug company, Gilead Sciences, asking for a reduction in the price of a widely used AIDS drug,  Atripla.  The letter made headlines all over the country, because Mr Chiang made it clear that without cooperation from companies such as Gilead, the entire government program of HIV/AIDS care might be devastated. 

John Chiang, Calif State Controller

Here is Morningstar’s take on it, but the story was covered very widely: http://www.morningstar.com/newsview-1/–BW–20110324006865_univ.xml.shtml.

There is no doubt that medical costs are straining budgets everywhere in the US.  And at the same time, there is also no doubt that US citizens have become accustomed to healthcare on demand, and that the consumers of healthcare are somewhat divorced from the cost of the services and drugs they receive, due to the intervention of third-party payors like insurance companies or government agencies.  Those who are not covered by some kind of policy flock to emergency services, which are obliged to deliver services to them as well.  It is hardly an ideal situation for anyone: taxpayers, patients, insurance companies, hospitals, healthcare providers, drug companies, government agencies.  As the Morningstar article puts it, “. . . last year the state considered potentially devastating cuts that would have resulted in Californians with HIV/AIDS losing access to lifesaving drugs.”

There are numerous ways that savvy investors may analyze this gathering storm to decide where the silver linings may be.   The most obvious answer is that generic drug companies may be the winners if big pharma and big biotech continue to look like fat cats who suck the life out of public and private coffers.  Many of the best-known generic companies are far too big for us to follow, but we have 3 that may be worth looking at.

Woodcliff Lake NY-based Par Pharmaceutical Companies (NYSE: PRX; http://www.parpharm.com/) may be a good place to start.  PRX makes antibiotics that are off-patent, antifungals, and a menu of tongue-twisting drugs for oral and transdermal use.  The shares are trading in the mid-31’s today, with a 52-week range of 24.51 to 39.57.  The market cap today is about $1.1 billion, and the average volume is about 340,000. 

Amityville NY-based Hi Tech Pharmacal Co Inc (Nasdaq: HITK; http://www.hitechpharm.com/) may also be worth your time.  It is much smaller, with a market cap of about $261 million, and a stock price at this writing of $20.57 vs a high-low spread of 16.69-26.18, so it’s right in the middle.  HITK has a mixed grill of generics for a huge list of indications: diabetes, glaucoma, nasal irritation, neurological disorders, pain, allergies, etc.  The stock trades pretty well, with an average of more than 180,000 shares a day. 

Detroit-based Caraco Pharmaceutical Labs Ltd is a third in this brief look (Amex: CPD; http://www.caraco.com/).  Again, a list as long as your arm of drugs and indications: big, small & in-between.  It’s smaller than the others, with a market cap of about $210 million and a current stock price of $5.21, with a 52-week range of 4.18 – 6.93, and daily volume of just over 50,000 shares. 

Another approach might be to look at interdisciplinary consultants who try to help healthcare providers install best practices, which includes reducing waste and redundancy.  Washington DC-based The Advisory Board Company (Nasdaq: ABCO; http://www.advisoryboardcompany.com/) might be one of the candidates.  They say they have about 3,000 client/customers, and that they offer 45 different programs to help these customers achieve optimal operations.  They recently acquired Vernon Hills IL-based Concuity, a company that helps hospitals achieve revenue management goals, control their relationships with payors, and get greater efficiency from their staffs.  You can see Concuity at http://www.concuity.com/

If you look overseas, you may find it interesting to examine Craneware, based in Edinburgh, and concentrating on providing software that helps healthcare providers achieve the best financial results in numerous ways: revenue integrity, cost containment, pricing, workflow, and recapturing lost revenue.  Craneware trades in London under the ticker CRW and has a market cap of about GBP 141 million.  Today’s close was at 530p (GBP5.30).  There is an unsponsored ADR that trades on the US Pink Sheets as CRWRF, which closed at $9.22 today — but it does not trade well (or often), and it settles as an “ordinary” share, not a US domestic ADR.  http://www.craneware.com/ 

None of the companies mentioned is a client of Allen & Caron.

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