The ongoing saga of the biggest drugs investigation in the history of Australian sport took a further dramatic twist last week. Players at the Essendon Football Club in the AFL were served with show-cause notices. The Cronulla Sharks in the NRL look to be next in the firing line.
While the alleged drug use was intended to enhance player performance, it has brought to mind the recent underperformance of some star players in the pharmaceutical and healthcare sector. In a similar fashion to the Australian Sports Anti-Doping Authority (ASADA), I will issue my own show-cause notices to the following three stocks.
1. From late February, the private hospital operator Ramsay Health Care Limited (ASX: RHC) has slid 8.5% (adjusted for paying a 34 cent dividend). In that time the S&P/ASX 200 Health Care (INDEXASX: XHJ) has fallen 3.1%. The peak share price for the year coincided with concerns that the stock was overvalued even though an interim profit release slightly exceeded expectations. Subsequently the company made a French acquisition which was unpopular due to perceptions of a challenging operating environment and limited synergistic benefits. These concerns should be only short term given an outstanding long-term acquisition record.
2. The international medical diagnostics company Sonic Healthcare Limited (ASX: SHL) has retraced 8.4% from a high of $18.34 in mid-May to $16.80. Over that same period the S&P/ASX 200 Health Care Index has risen marginally. A positively-trending share price was reversed in May, thanks to the Federal budget GP co-payment proposal. Government regulation in this space has the potential to cause unexpected shocks.
3. After reaching a high of $72.82 in mid-April, the biopharmaceutical company CSL Limited (ASX: CSL) has fallen 6.6% to $68.05, despite the S&P/ASX 200 Health Care Index rising 2.9% over the same period. Contributing to the share price decline were market share concerns throughout 2014 and 2015. These stemmed from improving IG supply and the potential US launch in the subcutaneous IG segment by a large competitor. In addition, a second competitor has a potential US launch in 2014 of a 10% liquid IVIG. It is hard to see these concerns diminishing in the near term.
In the sporting world, the next step after a show-cause notice issued by ASADA is the more serious infraction notice. Two companies that should receive these are Mesoblast limited (ASX: MSB) and Starpharma Holdings Limited (ASX: SPL), having fallen 27% and 30% respectively from early January highs. By comparison the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has risen 1%.
Mesoblast has a range of concerns, including a lack of near term catalysts and insufficient cash reserves to fund any commercialisation delays. Alternatively, Starpharma Holdings has several potential catalysts and for a biotech stock has an unusually low cash-burn rate to survive any approval delays. The share price has drifted due to only one drug in the stable displaying suboptimal results in a trial, and a recent news void.
Which stocks represent value?
In my opinion, Ramsay Health Care and Starpharma are good medium-to-long term buying opportunities. The former is a defensive stock that has also managed to grow underlying net profit for the last nine years. The latter is currently developing drugs aimed at treating an array of medical issues, particularly relating to women's health. The company has also used its platform technology and applied it to agricultural crop protection. It's expected that the portfolio will provide potential upside over at least the next 10 years.
Should your focus be trained upon a dividend stock which is ready to break out…?
The above two stocks are great long-term propositions. However, another long-term hold, which has the double attributes of a dividend-play and fast growth, has been isolated by our TOP Motley Fool analysts.
