From proton therapy to ostomy solutions, Claire Shaw details four unloved healthcare stocks providing solutions to the challenge of sustaining a better quality of life for the world’s greying population.
ConvaTec is one of the world's largest players in ostomy care – surgery performed to create an opening in the body for the discharge of waste – where it operates in a structurally-attractive oligopoly.
It is also the third largest global player in advanced wound care – dressings to treat acute and chronic wounds.
ConvaTec's share price has been weak since June 2017, due to concerns surrounding the execution of a widely anticipated 'Margin Improvement Plan', manufacturing issues in transferring a plant from the US to the Dominican Republic, which disrupted the supply chain, and a profit warning in October that put further pressure on the stock.
However, this is a business with strong competitive advantages. In wound care, it benefits from the market's high barriers to entry and low risk of disruption from new players due to the strength of its brand and the relationships it has built with healthcare professionals.
In ostomy, ConvaTec benefits from a very sticky customer base as you tend to find low switching rates due to the sensitive nature of such products.
Growth in wound care is driven by lifestyle changes (as many chronic wounds are directly or indirectly caused by obesity) and an ageing population, given increased surgery among this segment of the population.
In the ostomy, the prevalence of bowel diseases increase with age, which is driving growth in this part of the market.
Despite the temporary setback, the long-term outlook for ConvaTec is very strong, which is supported by attractive financials; high returns and profit margins and significant free cashflow.
Spire Healthcare is one of the UK's largest private hospital providers, with 39 hospitals and 12 clinics across the country. But 2017 was a turbulent year for the company.
It issued a profit warning last September, in response to lower NHS activity following the removal of the 18-week waiting list target. A failed bid by South African hospital group Mediclinic in October put further pressure on shares.
With NHS budgets and resources under severe pressure, and as the UK's demographic profile changes with population ageing, the UK's independent hospital sector has an important role to play offering private treatments and taking on NHS patients.
In the UK, it is projected that the 65+ age group is expected to increase from about 18% to 28% by 2050.
For Spire, the 'self-pay' segment of the market is growing rapidly, with those typically in the over-50s age bracket opting to pay for treatment to avoid lengthy waits. Spire is the number one player in this industry and should be well positioned to capitalise on this trend.
A new management team with a strong vision for the future of Spire provided us with an attractive entry point into a high-quality business with solid long term prospects.
Ion Beam Applications (IBA)
Proton therapy is a type of cancer radiotherapy deemed superior to conventional radiotherapy due to its better treatment efficacy and the minimisation of exposure to healthy tissue to the fact there is no exit beam.
With cancer being the leading cause of death in the developed world, and the prevalence as cancer rates rise dramatically in those aged over 55, the oncology market is set to continue to grow as companies continue to find ways to treat the disease.
IBA is the market leader in proton therapy – with roughly 50% of the global share – in this structurally attractive, oligopolistic market, which is expected to grow at a 15% CAGR to 2035.
Belgian-listed IBA delivered four profit warnings in 12 months, mainly due to delays in the construction process of its complex systems, which has caused the share price to more than half.
Despite these short-term, cyclical headwinds, the company benefits from high barriers to entry, a strong backlog equating to over €1bn of sales and a rock solid balance sheet which can support future growth.
Vectura Group is a leader in the development of respiratory products, including treatments for asthma and chronic obstructive pulmonary disease (known as 'smoker's cough') – the fourth leading cause of death worldwide with increasing prevalence particularly in the elderly.
The development of inhaled drugs requires the interplay of the following three factors: the drug, the formulation and the device; thus, it is a complex field, in which Vectura is a global leader with a very strong track record.
Its technology is embedded in half of new inhalers launched from 2012 to 2016, demonstrating it is the partner of choice for targeting airways.
Shares have been weak due to delays in obtaining approval from the US Food and Drug Administration for its generic version of GlaxoSmithKline's blockbuster drug Advair.
We could therefore see a substantial positive impact on its top line when this finally launches into the market.
Given its business model, which consists of receiving royalties on inhaler sales, Vectura has high revenue visibility and currently trades below the NPV of the current portfolio.
This means investors are getting the pipeline for free at today's share price.
Claire Shaw, manager of the OYSTER European Mid & Small Cap fund at SYZ Asset Management, picks four healthcare stocks which stand to benefit from a more ageing population.
Claire Shaw, manager of the OYSTER European Mid & Small Cap fund at SYZ Asset Management, picks four healthcare stocks which stand to benefit from a more ageing population. "The ailing healthcare sector...