Cowen analysts – Rotation in health-care stocks





Bracing for a rocky 2008, investors in health-care stocks are increasingly moving their cash out of "one-hit" wonder drug developers and into companies with broader-based product portfolios, according to analysts at Cowen and Co.

Bracing for a rocky 2008, investors in health-care stocks are increasingly moving their cash out of "one-hit" wonder drug developers and into companies with broader-based product portfolios, according to analysts at Cowen and Co.

In recent interviews, with a leading healthcare market information provider Cowen health-care analysts that investors are definitely shifting into defensive mode. But as opposed to previous market slowdowns, they're not just fleeing to Big Pharma, the traditional investor's safe haven, but to Big Biotech and medical technology stocks as well.

Big Biotech now defensive plays

"What we've seen is that in the small- and mid-size space, those stocks have traded down pretty considerably. There's much less investor interest today than there was about six months ago," said Phil Nadeau, a biotechnology analyst for Cowen.

Nadeau attributed much of the disaffection to the financial fragility of smaller biotech companies, pointing out that a typical small-cap biotech only has enough cash to operate for 18 to 24 months.

"In a really bad downturn, people worry that those companies wouldn't be able to access the public markets if they need to," Nadeau added.

Hard times for Specialty Pharma

Meanwhile, stocks of specialty pharmaceutical makers are increasingly under pressure.

"You're finding people are much less willing to take bets on binary events and at the same time less willing to take bets on early-stage programs," said Ian Sanderson, who tracks specialty pharmaceutical companies for Cowen.

Med-tech is back

Meanwhile, things are looking up in the often-overlooked medical technology and supplies sector.

"Anytime you have a slowdown, there's always the thinking that there's going to be a rotation into health care, that it's a bit more defensive," said Cowen's medical technology analyst Doug Schenkel.

Schenkel attributes med-tech's comeback to its comparatively low-risk profile in comparison to drug developers. A major selling point for the sector is that the regulatory approval process for medical devices tends to be significantly shorter and cheaper than for biotech therapies or pharmaceuticals. And products such as hospital supplies or research tools have almost no regulatory oversight.

"There's just a view that med-tech is a safer place largely because of the R&D challenges that exist in pharma that don't exist in med-tech," said Schenkel.

Schenkel names Medtronic Inc, Johnson & Johnson, Abbott Laboratories, St. Jude Medical, Zimmer Holdings and U.K.-based Smith & Nephew as few of the leading medical device plays.

“These companies are also a lot smaller, relatively speaking, than companies like Pfizer and Merck, so as a result, there isn't that same concern as to how much you're going to have to spend on R&D to maintain growth," Schenkel added.

Schenkel also sees "renewed and even new" interest in the large molecular diagnostics companies such as Gen-probe Inc, Celera Group, Qiagen N.V. and Cepheid Research toolmakers, such as Applied Biosystems.

Affymetrix Inc and Illumina Inc are also back into vogue after spending several years on the sidelines.
Traditional diagnostics developers such as Abbott, Beckman Coulter and Becton Dickinson are also getting a second look, said Schenkel, in part because they're also beginning to move into the molecular diagnostics space.

"Within diagnostics, you have high single-digit [revenue] growth, but within molecular diagnostics you have mid-teens growth. It's the highest growth area within diagnostics," said Schenkel.