Profiting from Health Care's Rebound

02/24/2010 12:00 pm EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue, editor of Personal Finance, says two health care companies are particularly well positioned—and attractively priced—to profit from the sector’s recovery.

Health care stocks have a well-deserved reputation for resiliency. The Standard & Poor’s 500 Health Care index handily outperformed a weak market in early 2009.

This outperformance ended when health care reform talk in Washington threatened to undermine the group’s profitability. Key health care indexes underperformed the S&P 500.

[But as] planned reforms were watered down to make them more palatable in the Senate, health care stocks regained their footing, [and] 2010 looks very bright for the sector.

On a price-to-book-value basis, the S&P 500 Health Care sector trades at a 25% premium to the S&P 500, well under its average 75% premium. In the five years after President Clinton’s health care reforms failed in Congress, health care stocks outperformed the S&P 500 by a two-to-one margin.

Baxter International (NYSE: BAX) operates in three major business segments: biosciences, medication delivery, and renal. The first is Baxter’s most important business, accounting for close to half of sales and 70% of total pre-tax income.

The company’s major products are injectable treatments that are manufactured from human blood plasma. Baxter’s first plasma-based treatment was developed for hemophilia, a blood disorder that prevents patients’ blood from clotting properly.

Another key plasma-based product is Gammaguard, a treatment for immune deficiencies. Gammaguard is a major near-term growth opportunity for Baxter as well. The drug is in Phase III trials as a treatment for Alzheimer’s disease, and results are due this spring. And Baxter is also in late-stage testing of a new delivery system that would allow the drug to be taken at home.

In total, Baxter has 14 projects in Phase III trials, up from two in 2006; the company’s research should yield a strong pipeline of new product launches during the next five years. Buy Baxter International under $65. (It closed just below $57 Tuesday—Editor.)

Biotechnology giant Gilead Sciences (NSDQ: GILD) focuses on treatments for HIV; its drugs Atripla and Truvada generate combined quarterly sales of close to $1.4 billion. Roughly 85% of HIV patients in the US take one of these two drugs.

Truvada combines two Gilead antiviral drugs—Viread and Emtriva—whereas Atripla is a mix of Truvada and a Bristol-Meyers Squibb (NYSE: BMY) drug called Sustiva. The three-in-one pill recently overtook Truvada as Gilead’s top seller.

There are a number of [possible] catalysts for Gilead this year. First, Gilead announced positive data from Phase II trial results for its new Quad pill, which combines Truvada with GS 9350, a boosting agent, and a new antiviral compound known as elvitegravir.

Quad is particularly important to Gilead because all the constituent drugs are in-house products; it won’t have to share royalties, as it has with Bristol for Atripla.

During its fourth-quarter conference call, management hiked revenue estimates for 2010, citing strengthening demand for its HIV treatments. Gilead Sciences rates a Buy under $55. (It closed above $47 Tuesday—Editor.)

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