Healthcare can be a tricky sector to assess -- it's incredibly competitive, and the average investor usually doesn’t have intimate knowledge of how the products work. What the average investor does have though is an ability to look at the financial health of the company, and make decisions based on the tangible numbers.
There are currently 556 healthcare sector stocks trading on the NYSE. But which of them are built on solid foundations, and which are more likely to sink? An investor could go and examine the products the 556 companies are churning out, or the details of the services they provide to find the good buys.
Or, an investor can just look for companies that can answer yes to the following four questions:
1) Are the company’s current and quick ratios both over one?
A healthcare company with a current ratio over one means they are currently not leveraged over what they could pay today, if they had to. Products sometimes take years of testing, and healthcare in general is a risky sector fraught with product recalls and high failure rates. A safety net of cash and assets can help a healthcare company weather misfires of the period until they can become profitable
2) Is the company a micro cap or bigger?
A micro cap company has at cap of at least $50 million dollars. Companies smaller than that tend to be more volatile, and thus tend to be riskier investments.
3) Is the internal ownership rate of the company 40 percent or higher?
High levels of internal ownership imply that the employees believe in the product. When internal ownership is over 40 percent it shows that the people within the company are invested, figuratively and literally, in the financial well-being of the company.
4) Does the company not pay a dividend yield?
It’s usually not wise for healthcare companies to pay stockholders a dividend on money they could be reinvesting, especially early in a company’s run.
Of the 556 companies on the market, there are five healthcare sector companies that can answer “yes” to all those questions. In fact, there were only five companies that could even answer "yes" to the first three questions.
So what are these companies, and what should investors know about them?
China Cord Blood Corporation (CO)
As their name implies, China Cord Blood specializes is a Chinese company that specializes in cord blood storage.
Private blood cord banking has become a trend of sorts across the world, as the theory holds that the stem cell-rich cord blood could one day be used to treat a variety of diseases the originator of the cord blood might face later in life. While the effectiveness of cord blood as a treatment method is genrally accepted, the chances of it being used by the child are often low – it’s “a very expensive insurance policy” as UCLA professor of pediatrics Stephen Feig points out.
Despite the cost, private blood banks like China Cord have become quite popular. The company sports a healthy 13.79 P/E ratio and is up 26.82 percent on the year to hit $3.31 a share.
Cornerstone Therapeutics Inc. (CRTX)
Cornerstone is a specialty pharmaceutical company that focuses on both developing and acquiring drug patents. The Cary, N.C. drug company also produces generic meds under its wholly owned subsidiary Aristos.
Cornerstone is no stranger to litigation. The company is currently embroiled a lawsuits involving patent infringement on one of its products, Cardene, by Exela Pharma Sciences, LLC. In June 2013 Cornerstone successfully beat a false advertising case brought against them over the fact they had used excerpts from a study published in a medical journal that were critical of a competitor’s drug that the competitors felt were misleading. The court cited protection of free speech and academic freedom in their ruling for Cornerstone.
Their stock is up 92.81 percent on the year to hit $9.12 a share. They have a target price of $13 a share.
FIbrocell Science, Inc. (FCSC)
This healthcare company produces skin and tissue rejuvenation products. Specifically, they focus on products that can treat the cosmetic effects of aging, acne, burn scars by using a patient’s own fibroblast cells.
In 2011 Fibrocell won FDA approval for an injectible skin smoother that utilizes stem cells to correct wrinkles. The drug, called azficel-T and marketed under the name Laviv, competes with the well-known Botox in the wrinkle-eliminating drug market.
Fibrocell is down 67.25 from two years ago, when the stock spiked following the approval of Laviv, though they are up 37.33 percent on the year to hit $5.15 a share.
Oragenics Inc. (OGEN)
Oragenics’ area of focus is “oral care probiotics.” To clarify what exactly "probiotics" are, they're essentially live bacteria that are beneficial to the host. Oral probiotics are claimed to “restore” the natural beneficial bacteria to the mouth, increase in a manner similar to how the probioitcs in yogurt are sometimes claimed to restore healthy gut functioning.
The company’s main product is called ProBiora 3, and is an alternative to fluoride mouthwash. It is marketed in the US under the name Evora. In May Oragenics received a patent in Europe for Evora.
Oragenics is up 18.94 percent on the year to hit $3.14 a share.
Sucampo Pharmaceuticals (SCMP)
The Bethesda, Md. – based Sucampo makes Amitza, which treats chronic idiopathic constipation. The basis of Sucampo’s research is in something called prostones, which are derived from functional fatty acids naturally found in the body.
According to the Cambridge Health Institute, approximately 12 million people suffer from CIC, and Americans shell out $350-400 million a year on OTC laxatives. Amitza treats both CIC and irrtitable bowel syndrome, otherwise known as IBS. CIC differs from IBS in that CIC is usually not painful.
Sucampo has performed well this year, up 37.76 to hit $6.75 a share. They have a price target of $11.25 a share.