For the entire furor surrounding the upcoming implementation of “Obamacare” at the start of next year, few have been able to advance anything that resembles a comprehensive assessment of what the legislation’s potential effects could be for the healthcare industry as a whole, and more specifically on the impact it will have for investors in this space.
One financial services firm that has firmly established itself as a key player is Aegis Capital Corp., which has a proven track record of identifying success based on its meticulous and differentiated approach in the world of healthcare. For nearly three decades, Aegis Capital has always stood out from its peers in the boutique investment banking sector, and its equity research division has, in recent years, developed a compelling methodology to selecting some of the best outperforming healthcare stocks in bull and bear markets.
The upcoming 2013 Aegis Capital HealthCare Conference, which kicks off on Wednesday, September 25 through September 28, at the Encore at the Wynn in Las Vegas, Nevada, will showcase over 45 of the best companies that the firm has worked with and researched.
“We feel that now there’s enough evidence out there – there’s enough of a track record on our platform for people to see clearly that our approach works, and that it works better than the approaches of our competitors,” said Raghuram “Ram” Selvaraju, Managing Director and Head of Healthcare Equity Research for Aegis. “Wall Street is very Darwinian, and Darwinism speaks to the core of biology. It’s survival of the fittest. If you don’t do it right, in the words of Gordon Gekko from the film Wall Street, you get eliminated. We want to eliminate the competition, and the way to do that is to show that you have a better mousetrap than they do. That is the reason why we are showcasing healthcare-focused companies at our conference, and that is the reason why we are putting these conferences together. This event is aimed at showcasing our approach to investors, and to put a spotlight on those companies that exemplify this approach.”
Aegis, which manages about $4 billion in assets for both institutional and retail investors, has established a great deal of investors’ trust in its ability to successfully put their capital to work. That success can in large part be attributed to Selvaraju’s efforts in developing a more critical selection process in the healthcare space. His credentials are bolstered by years of hands-on experience as a life sciences researcher, working as a drug developer for one of Europe’s largest pharmaceutical companies.
“If you think about what gives you more time on this earth, and what extends your life span, it’s the quality of your health. Simply put, if your health is bad, you will die sooner,” Selvaraju said. “The healthcare industry is the only industry that is directly working on the issue of health; keeping you alive. If you are not alive, by definition, you do not have time.”
He adds that, “if everything goes to hell in a hand basket, the sector that is going to perform the best, time and again, is going to be healthcare. When things are bad, healthcare is a vertical that demonstrates defensive and resistance qualities.”
Selvaraju knows this better than anyone. “In 2008, when the rest of the indices were down 25 to 30 percent, including the biotech indices, my recommendations were down only 1 percent,” he said. “I achieved this by focusing on companies that nobody else was looking at.” Selvaraju is highly optimistic regarding the importance of the industry in and around which he has worked throughout his life. His optimism grows out of an organic, distinctly philosophical view, every bit as much as it relies on the more obvious goal of generating returns for shareholders.
With this basic premise as a guiding principle, the experience and expertise of the equities research team at Aegis has proven itself. Among boutiques, the company has done “more deals than any other investment bank on Wall Street in the life-sciences space…with about $240 million in capital raised in 2012 in healthcare alone, and we are on pace to easily exceed $300 million this year.”
There are fundamental changes taking place in the industry that need to be accounted for if investors are to entertain reasonable expectations for returns. “Business models in healthcare have changed dramatically. No longer do people think of promoting a drug to millions of people, many of whom are not going to respond, using a sales force of tens if not hundreds of thousands of people,” Selvaraju said. “These days the business model is all about being lean and mean: specialty drug launches, making sure the drug benefits 80 to 90, if not 100 percent of the people who are dosed with it. You need to make sure you can promote this drug with small numbers of sales representatives – hundreds of people, not thousands. The rise of these new, capital-efficient business models means that pharmaceutical and biotech companies can not only survive but also thrive in a post-Obamacare world.”
Aside from the Patient Protection and Affordable Care Act, there are plenty of other currents that will lead healthcare companies in new directions. The equity research team at Aegis is making sure that its clients are positioned in such a way as to benefit from these changes, rather than succumb to them. The firm’s research universe spans biotechnology, specialty pharmaceuticals, molecular diagnostics and emerging markets, with a particular emphasis on Israel and China.
The timing couldn’t be better. Aside from the Patient Protection and Affordable Care Act, the Federal Reserve is on the brink of beginning its gradual drawdown of fiscal stimulus, as a result of which we are likely to see who the real winners have been in 2013’s somewhat astonishing bull market.
According to Selvaraju, the financial crisis of 2007-2008 “brutally showcased how weak major sections of the world economy – and specifically the U.S. economy – really are.”
“Right now, oil and gas is enjoying resurgence because of domestic drilling and domestic energy policies, and so on and so forth,” he explained. “But eventually, we know we’re going to run out of fossil fuel, so I don’t think there’s a real long-term future there. Eventually, it’s going to come back to renewables and clean energy. But if you look at the other verticals, none of them are appealing to me.”
For its part, the tech sector is in a constant state of flux and, “if the economy takes a turn for the worse, consumer retail is going to be in the crapper. Financial services, forget it. Our banks are in a horrible state. They’re still in a horrible state years after the financial crisis, and have still not been able to get their house in order. They’re completely hopeless.”
For healthcare, new and more challenging medical issues are also playing a role in the changing composition of the industry. Aegis sees these challenges better-met by smaller, more nimble companies who can focus on innovative therapies for specific, underserved maladies and afflictions, ranging from attention deficit/hyperactivity disorder (ADHD), to prostate cancer, to multiple sclerosis.
Selvaraju also sees a very promising IPO market in the healthcare space in the upcoming year. “There have been about 36 biotech/life sciences IPOs to date in the U.S., and I think so far maybe 32 to 33 of them are up from the original pricing of the deal. The average deal performance across these IPOs is up about 45 percent.” Among the best performers is Stemline Therapeutics, Inc. (STML) , which was not only the first biotech IPO of 2013, with “Aegis’ fingerprints all over it”, but also the best performing biotech IPO this year to date, up over 300 percent. While others have chosen to view the current IPO environment as a return to the heady days of biotech’s last boom-and-bust cycle, in 1999 – 2000, with preclinical-stage firms going public at elevated valuations, Selvaraju focuses investors’ attention on the risk-mitigated, valuation-sensitive nature of the Aegis platform. “It’s a ‘moneyball’ approach to healthcare investing. We want to generate positive returns consistently for our investors,” he says.
The upcoming conference in Vegas will provide an illustration of just how Aegis has come to occupy a relatively unheralded, quietly dominant position in healthcare. The companies presenting at next week’s conference are a testament to this, as each has been selected in strict adherence to five basic criteria:
- Aegis is interested in companies with limited operating histories
- Low accumulated deficits (i.e. solid expense control and capital-efficient operations)
- Management that is acutely sensitive to the objectives of shareholders (i.e. management and shareholder objectives are aligned, with management holding ownership stakes in their firms)
- Products that have a realistic chance of gaining FDA approval (i.e., risk-mitigated candidates with proven safety and efficacy in well-controlled clinical trials)
- Companies that have a business model based on more than the hype that is too-often generated from the promise of one single drug treatment (i.e. technology platforms, multiple shots on goal, and risk-mitigated mechanisms of action)
For investors interested in healthcare stocks, these companies may not have familiar names, but Aegis sees them as the most promising in the industry. Furthermore, their presentations will bear out the strengths of Aegis’s screening process. With such a high bar in place, it can be expected that all of them will be bringing valuable and enlightening perspectives to the table.
Perhaps what investors can most look forward to from the conference is best expressed by Selvaraju himself: “That’s really the crux of what we’re trying to do here. We want our investors to make money without taking unnecessary risks. It’s a win-win for everybody, but at the same time, we’re extremely competitive and aggressive. If our business model works better than those of our competitors, we like nothing better than to deploy that advantage in order to stomp our competition into the dust and leave them staring at our wake as we leave them all behind. We’re traveling at virtually supersonic speed right now, and I don’t think there’s another bank in the boutique bracket that can hold a candle to what we’re doing. It’s an extremely differentiated methodology, and we’re very proud of what we’ve built.”
A Few Highlights of the Over 45 Presentations:
Acorda Therapeutics, Inc. (ACOR) – Acorda Therapeutics is a $1.45 billion biotech company that is currently developing treatments for a number of underserved and quite serious medical conditions, particularly the AMPYRA treatment for walking impairment related to multiple sclerosis. The company’s shares are currently trading for $35 each for an advance of 45 percent in 2013.
Alcobra Ltd. (ADHD) – The $144 million market cap Israeli company is currently working on developing what looks to be the safest anti-ADHD therapeutic agent clinically tested to date. Shares are currently trading for just shy of $16, and have advanced an impressive 112 percent year-to-date.
Catalyst Pharmaceutical Partners, Inc. (CPRX) – The $119 million market cap company was trading for just $0.47 per share in April 2013 when Aegis rolled out research coverage with a price target of $2.50 per share. Catalyst is developing a novel agent called Firdapse for the treatment of a rare neurodegenerative disorder called Lambert-Eaton myasthenic syndrome (LEMS). The drug could wind up being priced at over $100,000 per patient annually, given the ultra-orphan nature of the disease. Since Firdapse is already marketed in Europe for LEMS and is currently in Phase 3 testing in the U.S., the firm seems heavily risk-mitigated. Catalyst also has another candidate, CPP-115, in development for epilepsy and other movement disorders. Aegis currently has a $4 per share target price, and sees further upside with the stock trading at $2.86, implying an enterprise value that is still under $100 million.
Galectin Therapeutics, Inc. (GALT) – The $158 million market cap company was trading for $1.77 per share when Selvaraju began covering the stock. Since that time, however, this nascent drug maker, focused on the reversal of liver fibrosis, has become the best returning equity in his portfolio, at over 400 percent. The firm’s shares recently hit a 52-week high at over $12 per share. Currently priced at $9.25, shares have advanced over 350 percent so far this year.
Medivation, Inc. (MDVN) – A $4.5 billion firm, Medivation was trading for $2 per share on a split-adjusted basis back in 2006. Currently, shares are priced at $59, up 16 percent on the year, with more upside in store as the company prepares to release new pivotal clinical data with its new and promising treatment for prostate cancer that is already marketed to treat patients who have failed chemotherapy, and which is also being developed in earlier-stage prostate cancer as well as breast cancer.
Synergy Pharmaceuticals, Inc. (SGYP) – Synergy is a $428 million market-cap company that specializes in treatments for irritable bowel syndrome, as well as inflammatory bowel disease. Shares are trading for $4.75, representing an advance of 4 percent over the past year.
Other presenting companies that will be in attendance include, but are by no means limited to, Advanced Cell Technology, Inc. ($ACTC), Champions Oncology (CSBR) , NeoStem, Inc. (NBS), and Spectrum Pharmaceuticals (SPPI).
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer