Source: Flickr user Rafael Matsunaga.
The healthcare sector is really an oddball when it comes to valuations. Whereas companies in most sectors are valued based on their level of sales and profit growth, a significant number of healthcare companies wind up being valued based on speculation about how many people their drug, device, or diagnostic portfolio could eventually treat.
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Losing money can be fairly common in the healthcare sector, especially if a company is predominantly in the clinical stages of its drug or product development. It means healthcare companies are regularly looking to raise capital post-IPO, and that can sometimes mean dilutive stock offerings.
Finally, healthcare companies tend to be more prone to emotional investing than any other sector. Because fundamentals can play such a minimal role in clinical-stage biotech and medical diagnostic companies, there gets to be an almost "anything goes" mentality among Wall Street and investors as to what a company could really be worth. This can lead to high volatility (relative to the S&P 500) and valuations that don't always make sense, to the upside or the downside.
The most hated companies in healthcare As you might imagine, anytime emotions come into play you're bound to draw the attention of short-sellers, investors who believe a stock price is going to head lower. The easiest way to decipher whether a company is "hated" or not is to simply look at its short percentage relative to its float. This percentage is merely telling you how many cumulative shares short-sellers currently have in comparison to the total number of shares available for investors to trade (thus float and not total outstanding shares). In theory, the higher the short percentage, the more hated the company.
Who are the most hated companies in healthcare? They tend to be biotechnology, with nine out of the top 10 currently losing money. Let's have a quick look at the most hated companies in healthcare, run down some of the reasoning why a few of these companies are so disliked, and then pick out one that I believe short-sellers could be wrong about.
The 10 most hated companies in healthcare by the percentage of short shares relative to float are:
Why do investors hate these companies? Investor dislike of these 10 healthcare companies comes down to a myriad of reasons.
For a company like VIVUS, it's purely a result of poor product performance. When VIVUS' weight control management drug Qsymia was approved in 2012, it was labeled as a potential blockbuster by Wall Street. Within the United States more than a third of the adult population is considered obese, with another third considered overweight, according to the body mass index calculation. In other words, there should have been a solid marketing opportunity for Qsymia, since it was one of the first weight-loss drugs approved by the Food and Drug Administration in more than a decade.
Unfortunately, that hasn't materialized, and Qsymia has failed to live up to investors' expectations in a big way. Full-year sales of the drug in 2014 totaled just $45.3 million. Although this nearly doubled its 2013 sales total, let's remember we were talking about a potential billion dollar per year drug at one point. Whether the problem is the favorable safety profile of Qsymia's peers or its lack of a partner is anyone's guess, but short sellers have been more than justified in betting against VIVUS.
In the case of Sarepta Therapeutics, investors worry about the company's reliance on a single product/development pathway, and its less-than-stellar management team.
Sarepta is attempting to develop exon-skipping therapies to treat Duchenne muscular dystrophy (DMD) in children and young adults. Its method of treating the disease (exon-skipping) holds the same for each of its prospective eight clinical DMD compounds, including eteplirsen, its most advanced. If for some reason eteplirsen isn't approved by the FDA, it would throw the majority of Sarepta's remaining exon-skipping pipeline into question and seriously strain the company's current valuation.
Source: Sarepta Therapeutics.
For what it's worth, eteplirsen has shown a statistically significant benefit in an extended phase 2b study, but the patient pool is so small, and the FDA so leery, that approval is still anyone's guess.
Additionally, a new drug filing for eteplirsen has already been delayed due to perceived miscommunications between the FDA and Sarepta's management team -- and let's just say upfront that clinical-stage biotech investors aren't the most patient crowd. Over the last year short-sellers have reaped substantial rewards betting against Sarepta.
Finally, investors sometimes decide to short-sell a stock because they believe it's fully valued, as is the case with MannKind.
In June the FDA approved MannKind's Afrezza, a rapidly acting inhaled powder for type 1 and type 2 diabetes patients. Afrezza was expected to be a bump up in convenience for diabetics who don't want to poke themselves with needles on a regular basis. Afrezza also metabolizes through the body quicker, leading to potentially fewer hypoglycemic incidences (i.e., low blood sugar).
However, MannKind isn't going to hold on to all of Afrezza's revenue. MannKind wound up licensing Afrezza to Sanofiin exchange for $150 million in upfront cash and an advance of $175 million for Sanofi's part of the shared expenses. Ultimately, MannKind will only net 35% of all profits and losses, with the remainder going to Sanofi. This leaves MannKind with $775 million in potential additional milestone payments if Afrezza hits the consensus estimate of $2 billion in sales. The concern here is that even if MannKind reaps these rewards, the company is still valued at roughly three times its share of these sales. With biotech buyouts over the past couple of months regularly occurring at premiums of three times sales, short-sellers have to be thinking that MannKind is already fully valued here.
One company investors could be wrong aboutIf there's a hated healthcare company that investors could be wrong about, I'd suggest it's diagnostic device maker Exact Sciences.
Source: Exact Sciences, Facebook.
Exact Sciences' DNA screening tool for colorectal cancer known as Cologuard didn't exactly wow with sales in its latest quarter, netting just $1.5 million in total sales. Sporting a valuation of more than $2 billion, the company has been an easy target for skeptical investors.
However, Cologuard, which was approved by the FDA last summer, gives patients a noninvasive and more accurate colorectal cancer diagnosis than the previous noninvasive standard of care. More importantly, the Centers for Medicare and Medicaid Services already announced that it'd be reimbursing qualified individuals for Cologuard. As one of the most common and deadliest cancer types, and, according to Exact Sciences, "the most preventable," it just seems logical to me that Cologuard is going to pick up steam over time.
It'll certainly take more insurer coverage to allay the fears of skeptics, but look for Exact Sciences to surprise the naysayers over the long run.
The article 10 Most Hated Companies in Healthcare originally appeared on Fool.com.
Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. 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.
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