It’s been an uncomfortable stretch for fans of Healthcare stocks, with names across the board losing lots of ground over the past half-year. But fear not, the space still has some great investment ideas, and investment bankers iA Capital Markets has a whole boatload of them across various sub-sectors. iA Capital analyst Chelsea Stellick delivered an Industry Report on Monday which singled out 16 companies in the Canadian Healthcare space, all with Buy or Speculative Buy ratings.
Stellick said it’s clearly been a difficult environment for Healthcare, as the recent market downturn continues amid geopolitical risks, further pandemic fallout and supply chain issues globally. Those pressures mean investors should be thinking more defensively in general yet also with an eye on the more risk-related parts of the sector for when market sentiment recovers.
“Although our covered healthcare companies have declined an average of 17.7 per cent year-to-date, our coverage has outperformed the S&P/TSX Capped Health Care Index (down 23.1 per cent year-to-date) and the SPDR S&P Biotech ETF (down 31.9 per cent year-to-date) and reflects a challenging environment for the overall sector,” Stellick wrote.
“Regardless of this short-term drop, many long-term sector tailwinds remain intact including demographic trends, favourable public policy, increased adoption of technology, and government support for innovation. We firmly believe healthcare cannot be ignored and will bring outsized returns as a long-term portfolio holding,” she said.
To that end, Stellick has divided up the Healthcare space into four groupings, with a number of picks from each of Consumer Health Staples, Healthcare Operators, Healthcare Technology and Biotechnology. (All projected returns are as of publication date.)
Stellick began with Consumer Health Staples which includes names in the pharmaceutical space that Stellick said can stand as defensive plays as they provide essential services.
DRI Healthcare Trust (DRI Healthcare Trust Stock Quote, Charts, News, Analysts, Financials TSX:DHT.U)
Target Price: $14.00 per share
Projected one-year return to target: 86 per cent
Stellick said healthcare royalty investment company DRI Healthcare Trust is particularly well-suited for a difficult market environment as the Trust can be opportunistic in a high capital cost environment by providing an alternative financing method via upfront capital in exchange for future royalties, a valuable option for biotech development companies. Stellick said DRI recently announced an upsized credit facility to expand its credit availability from $200 million to $300 million, $71 million of which is currently drawn.
“The increased size of the credit facility and maturity extension provide additional flexibility for DRI to pursue its growth strategy through acquisition of global pharmaceutical royalties from high-quality products that are protected from generic and biosimilar competition. Coupled with the Company’s existing cash balance of ~$62M, there is ample balance sheet strength for multiple asset acquisitions this year and next. The syndicate is also backed by leading multinational banks, which validates DRI’s financial strength,” Stellick wrote.
HLS Therapeutics (HLS Therapeutics Stock Quote, Charts, News, Analysts, Financials TSX:HLS)
Target Price: $25.00
Projected one-year return to target: 82 per cent
Specialty pharma company HLS Therapeutics has established, branded pharmaceutical products and has recently signed an LOI to obtain public market reimbursement in Canada for its most important product, Vascepa. The move sets HLS up for securing product listing agreements with each province for Vascepa, which will eventually lead to a “very steep” sales ramp, according to Stellick.
“While the peak-year sales guidance for Vascepa has come down to US$196-235 million, the Company is on track to reach this range by 2026 based on the sales penetration made thus far and the agreement with the highly skilled Pfizer sales force to market Vascepa on HLS’ behalf,” she said.
Neighbourly Pharmacy (Neighbourly Pharmacy Stock Quote, Charts, News, Analysts, Financials TSX:NBLY)
Target Price: $40.00
Projected one-year return to target: 65 per cent
Canada’s largest network of community pharmacies at currently over 270 locations, Neighbourly is consolidated the fragmented space, with Stellick saying the company has a strong reputation for successful acquisition and integration and that investors should benefit from buying with the latest dip.
“Neighbourly has continued to make key acquisitions to expand its nationwide footprint faster than anticipated at IPO. We expect a normalization of the retail and hospital pharmacy channels at a faster rate than non-retail, so we see the recent stock downturn as an opportunity to add a defensive component to portfolios,” she wrote.
Valeo Pharma Inc (Valeo Pharma Stock Quote, Charts, News, Analysts, Financials TSX:VPH)
Target Price: $1.60
Projected one-year return to target: 202 per cent
Valeo Pharma has products in respiratory, specialty, neurology and oncology, with Stellick pointing to a recent delisting of branded originator of enoxaparin for treating thromboembolic disorders, with Valeo’s own Redesca, a biosimilar, now publicly covered across Canada and expected to pick up steam. Valeo’s asthma therapies Enerzair and Atectura also now have public coverage in all provinces except two, with Stellick expecting the remaining two to announce shortly.
“These reimbursement decisions were expected and will enable VPH to achieve our forecast of $12 million in Redesca sales in F2022, with peak sales above $30 million in F2024, and $7 million in Enerzair and Atectura sales in F2022, with peak sales above $100 million reached in F2026 since the asthma market is mature and difficult to capture from incumbents. Following a convertible financing, VPH has pro forma cash of $22 million which will finance the Company through to profitability,” Stellick said.
In the Healthcare Operators group, Stellick said while supply chain issues plague companies in this space as well as in others, the importance of essential healthcare delivery has been underlined by the pandemic and led to “the most favourable pricing policy environment in years,” according to Stellick.
Rating: Buy (and a 2022 Top Pick)
Target Price: $10.00
Projected one-year return to target: 92 per cent
CareRx provides speciality pharmacy services to seniors and a little over a month ago announced a definitive asset purchase agreement to acquire Hogan Pharmacy Partners, which Stellick called “the Cadillac of long-term care and retirement home pharmacy.” Stellick said Hogan’s customers will benefit from the significant scale CareRx will bring and CareRx will have the optionality to upsell the higher revenue, higher margin Hogan Model to existing customers.
“Closing of this acquisition is expected this month, which will consolidate CRRX’s leading position in Ontario and we estimate will contribute $4.2 million in revenue and $0.6 million Adj. EBITDA before expected growth and synergies. This acquisition moves CRRX closer to meeting its target of 130K beds and $500 million annual revenue in 2024 and improves Adj. EBITDA margins,” Stellick wrote.
Quipt Home Medical (Quipt Home Medical Stock Quote, Charts, News, Analysts, Financials TSX:QIPT)
Target Price: $14.00
Projected one-year return to target: 141 per cent
US-based in-home monitoring equipment company Quipt also gets the nod from iA Capital, with Stellick saying the company is making strides towards becoming a national platform. Plus, they recently announced a national insurance contract with a top-five health insurer (thought to be UnitedHealth, the largest commercial payor in the US).
“This contract is meaningful as it broadens QIPT’s geographic footprint and supports its push into new states. QIPT will be able to immediately leverage the national contract to capture many more eligible patients to help position the Company as a sector leader,” Stellick wrote.
Medical Facilities Corp (Medical Facilities Corp Stock Quote, Charts, News, Analysts, Financials TSX:DR)
Target Price: $12.00
Projected one-year return to target: 21 per cent
Stellick also likes Medical Facilities, which owns surgical facilities in the US including specialty hospitals and ambulatory surgery centres. Stellick said surgical volumes will eventually recover to pre-pandemic levels, which will be good for DR.
“The Company has an overcapitalized balance sheet and is generating more cash every quarter, so the business will easily support growth and material buybacks alongside ongoing cash distributions due to a very conservative payout ratio of 24 per cent in 2021,” she wrote.
Microbix Biosystems (Microbix Biosystems Stock Quote, Charts, News, Analysts, Financials TSX:MBX)
Target Price: $1.50
Projected one-year return to target: 183 per cent
Biological products company Microbix should also benefit from changes post-pandemic, according to Stellick, who said public and private health resources will shift to deal with neglected health issues which should help sales of MBX’s testing products.
“Market share capture of the non-COVID diagnostic testing market will be helpful in diversifying MBX’s product portfolio to prepare for normalization of COVID-19, although we do expect COVID testing to persist long term at a lower level and make an ongoing contribution to MBX’s sales,” she said.
Hamilton Thorne (Hamilton Thorne Stock Quote, Charts, News, Analysts, Financials TSXV:HTL)
Target Price: $2.50
Projected return to target: 45 per cent
Precision instrument and software company Hamilton Thorne recently delivered top and bottom line beats in its fourth quarter 2021 report, with the company taking strides last year in expanding its product line, geographic coverage and scale through the acquisition of IVFTech and Tek-Event.
“Long-term tailwinds are still intact due to several favourable trends: continuing declines in birth rates caused by delays in pregnancy age, increasing affordability of Assisted Reproductive Technologies (ART) due to income growth in developing countries and expanding reimbursement programs in the US and developed markets, improved outcomes from the adoption of new technologies and procedures, and demands for animal ART to improve breeding efficiency in food production and endangered species protection,” Stellick said.
Moving on to Health Technology, Stellick said while the space is currently more risk-on due to the overlap with the general technology sector as well as the past 12 months being strongly negative for health tech market sentiment and valuations, health tech stocks are exhibiting an attractive entry point currently for “steadfast value investors” as the space continues to consolidate following the bubble burst correction last year.
Carebook Technologies (Carebook Technologies Stock Quote, Charts, News, Analysts, Financials TSXV:CRBK)
Target Price: $0.70
Projected one-year return to target: 338 per cent
Mobile health management company Carebook last week expanded its offerings to Air Canada with a new contract on wellness-specific programming, which is the latest in a line of wins for the company, according to Stellick.
“We view this Air Canada contract and other recent contract wins positively because it shows early success from the new management’s focus on a streamlined sales-focused operation, and validates the CoreHealth integration strategy in that Carebook is able to upsell its offering to a hallmark Canadian firm. Air Canada currently has 19,800 employees, which is a large customer since any business with more than 5-10K employees represents a meaningful contract size for CRBK,” Stellick said.
Dialogue Health Technologies (Dialogue Health Technologies Stock Quote, Charts, News, Analysts, Financials TSX:CARE)
Target Price: $9.50
Projected one-year return to target: 86 per cent
Stellick also likes virtual health platform Dialogue Health, which last month launched its Mental Health+ service to integrate its various levels of intervention, and the analyst sees the asset as improving access to mental health services and decreasing the barriers for mental health support.
“Mental Health+ seeks to alleviate the issues brought to light from an Environics report in 2021 which stated 45 per cent of Canadians reported worsened mental health over the course of the pandemic and that 24 per cent believe the mental health support in their current benefit plans is not meeting their needs,” she said.
Finally, Stellick has a handful of names from the Biotechnology space, where she cautions companies may find it more difficult to obtain capital in the current climate. At the same time, Stellick said the companies she’s chosen each have high-value assets that serve significant unmet needs and can continue to make progress in the current environment.
Rating: Speculative Buy
Target Price: $5.00
Projected one-year return to target: 415 per cent
Stellick said ACOG’s preclinical results for its ALPHA-1062 traumatic brain injury (TBI) study showed the asset to be neuroprotective, and while the majority of near-term value in ACOG lies in ALPHA-1062’s application in Alzheimer’s Disease, adding diversity to its development pipeline (with TBI and ALS) will give further upside to the name.
“With due caution, given the early stage and preliminary data, we are nonetheless encouraged that TBI and ALS are programs worth pursuing, without losing sight of the preeminence of AD for the Company. We believe the current quarter is an excellent entry point for ACOG, ahead of the AD pivotal trial top line expected this quarter (Q2/22),” Stellick wrote.
Rating: Speculative Buy
Target Price: $5.00
Projected one-year return to target: 216 per cent
IMV develops immunotherapies and Stellick says the company’s pipeline has several shots on goal, particularly regarding metastatic bladder cancer, on which the company recently released data on a Phase 2 basket trial.
“We expect further development in metastatic bladder cancer based on these encouraging basket trial results. Cash runway of more than one year and several catalysts in H2/22 and 2023 make 2022 a great entry point for IMV, given the current obvious undervaluation,” she wrote.
LexaGene Holdings (LexaGene Stock Quote, Charts, News, Analysts, Financials TSXV:LXG)
Target Price: $0.75
Projected one-year return to target: 226 per cent
Molecular diagnostics company recently announced the sale of four of its MiQLab Systems to veterinary labs in the US, which should lead to further sales, according to Sellick. Three of the MiQLab sales went to one of three main corporate veterinary companies in the US.
“Since testing in the corporate veterinary industry is dominated by three companies in the US, this initial sale may encourage other companies to adopt such technologies due to the oligopolistic nature of the industry and likely interdependence in decision-making. LexaGene’s entry into the academic space and becoming a member of AAHA are also positive developments as these provide the Company with additional exposure and avenues for marketing,” Stellick said.
Rating: Speculative Buy
Target Price: $6.00
Projected one-year return to target: 168 per cent
Stellick noted that NervGen’s lead drug candidate NVG-291 has published positive interim results from an ongoing Phase 1 trial and the company is currently running toxicology studies in effort to remove a partial clinical trial hold by the US FDA.
Stellick wrote, “Preliminary evidence from the ongoing Phase 1 trial thus far has been consistently supportive of NVG-291 as a promising candidate for therapeutic use, with the pharmacokinetics and safety performing above our expectations thus far. NervGen continues to confirm these results with incremental milestones to collect safety and pharmacokinetic data at high doses. The data so far puts NGEN on track to initiate Phase 1b/2 efficacy studies in AD, multiple sclerosis, and spinal cord injury in H2/2022.”
Rating: Speculative Buy
Target Price: $3.00
Projected one-year return to target: 108 per cent
Finally, Stellick likes Sernova, which has a proprietary Cell Pouch technology and develops products for chronic debilitating diseases. The analyst said a recent data safety monitoring board recommendation to continue the company’s Phase 1/2 type 1 diabetes trial is encouraging from a safety perspective and will allow Sernova to continue collecting long-term outcomes data for its flagship program.
“SVA is working to initiate a first-in-human trial for its hypothyroid disease program following an encouraging publication that came out earlier this year showing persistent thyroid hormone production in an animal model of hypothyroidism. This program has significant potential to diversify Sernova’s clinical development and increase the learnings regarding use of the Cell Pouch to achieve diverse clinical goals. We believe an announcement regarding a stem cell partnership is likely in the balance of 2022 and continue to see Sernova as a best-in-class biotech,” Stellick wrote.