A Diagnostic Review of My Healthcare Watch List
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Having just surgically removed a company from my watch list, I didn’t want to let too much time pass before filling that hole. By using a combination of options strategies and mixing it with soon to be delivered dividend income, the little paper trading portfolio that I like to call the “No Drip, No Mess” Portfolio is getting ready to grow. Because health care plays such a vital role in both our economy and our society, I think it’s imperative that it has prominent place in the portfolio.
Before we get too involved in adding something new to the watch list, I thought it best to first discuss some changes that recently happened at another company from the same watch list. When SXC Health Solutions announced that it was merging with competitor Catalyst Health Solutions I thought that the deal would give the combined company a tremendous advantage in negotiating new Pharmacy Benefit Management deals. Their combined scale, while still dwarfing rivals like Express Scripts (NASDAQ: ESRX) and CVS Caremark (NYSE: CVS) does put them in a much better position than before. The PBM industry is one where scale matters. Express Scripts is the leading PBM provider after acquiring Medco a few months back while CVS of course has their vast network of pharmacies. SCX has a long way to go before they can rival that scale, so they are working to differentiate themselves in other ways.
The first step toward this differentiation came via a complete rebrand of the combined company. Former SXC and Catalyst investors and watchers meet Catamaran (NASDAQ: CTRX). A catamaran is a boat with twin hulls in parallel and for the PBM this meant combining SXC’s best in class technology with Catalyst’s best in class service. While I’ll continue to watch how the integration goes, but early signs are good. In an interview discussing the completion of the merger and rebrand, CEO Mark Thierer said that he’s" wildly optimistic" about the current selling season for 2013 and that they’ve "already had some wins."
Now, for the main event, the newest member of my health care watch list. After looking through a handful of companies, I’ve settled on Genomic Health (NASDAQ: GHDX). Genomic is a leader in diagnostic tests for cancer screening with tests on the market for breast and colon cancer while currently developing tests for prostate and renal cancer along with a few others in their pipeline. These tests enable doctors optimize treatment for their patients by avoiding unnecessary surgeries and chemo while saving money over the long term for insurance companies.
The value proposition is substantial as an estimated $80 billion will be spent on cancer therapies with an average efficacy of just 25%. In breast cancer alone there are 100,000 new diagnosis each year. By using the company’s Oncotype DX test on breast cancer, there is a demonstrated 37% change in treatment decisions based on the test results which save hundreds of millions of dollars. This not only saves money but by specializing treatments it can potentially lead to better outcomes.
The most important consideration in watching Genomic is their current valuation at over 100 times earnings. They key though is to look at where the company could be in the next couple of years. Genomic believes that there is a $3.5 billion dollar worldwide market opportunity for their tests and at just $200 million dollars in current revenue that’s a substantial opportunity. I’ll be watching to see if they can continue to grow into their valuation, if shares get dinged in a market downturn, I’ll be a very interested buyer.
Healthcare might be a hot button issue these days but it’s also a hot bed for potential investment returns. The portfolio only has exposure to healthcare by association through holding hospital real estate company Medical Properties Trust (NYSE: MPW). That will change over time as I plan on allocating around 10% of the portfolio to healthcare related companies, excluding our exposure through Medical Properties. We will be seeking both income and upside so stay tuned for what lies ahead.
latimerburned owns shares of Medical Properties Trust, Genomic Health and Catamaran. The Motley Fool owns shares of Catamaran, Express Scripts, and Genomic Health. Motley Fool newsletter services recommend Catamaran, Express Scripts, and Genomic Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.