Identifying health care stocks with superior returns


Transcription of Finance News Network Interview with Fairview Equity Partners Portfolio Manager Michael Glenane
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from Fairview Equity Partners, is Portfolio Manager Michael Glenane. Michael, welcome back to FNN.
Michael Glenane: Nice to be back.
Lelde Smits: How has Fairview performed since inception and what have been some of the highlights?
Michael Glenane: Since inception our fund has delivered 15.4 per cent above the benchmark per annum after all fees. The benchmark which is a small ordinaries accumulation index has delivered about 2.7 per cent per annum.
Our inception now is about six years, it was actually October 2008 which was a very volatile time. As far as some of the highlights, one of them actually would be the health care sector over the last couple of years we’ve managed to turn $42 million of retail investor’s money into $72 million.
Lelde Smits: Looking closer at the health space, how important is the health space for the small ordinaries index?
Michael Glenane: It’s the tenth most important sector of the 25 sectors that we look at here at Fairview. It’s got about 4 per cent of the index weight, but interestingly there’s quite a few stocks that we don’t look at either, they’re too large or too small. There are a total of 121 stocks that are listed on the exchange which are health care denominated; we look at 48 of them.
Lelde Smits: How much volatility do you see in the health care sector?
Michael Glenane: The health care sector is very volatile you can see stocks lose 90 per cent of their value in a year or many hundreds of fold. What happens is that stocks which come close to a clinical trial endpoint will either have a massive increase or a large decrease in value.
Classic example over the last year QRxPharma Limited (ASX:QRX). Moxduo was effectively knocked on the head at the FDA which is the food and drug administration in the United States. That stock lost over 90 per cent of its value.
Lelde Smits: What healthcare stocks does Fairview currently hold?
Michael Glenane: We hold three stocks at the moment; Alchemia Limited (ASX:ACL), Mayne Pharma Group Limited (ASX:MYX, and Sirtex Medical Limited (ASX:SRX)
Lelde Smits: What are the upcoming catalysts for these stocks?
Michael Glenane: Firstly for Alchemia there’s a phase three clinical trial result due in about three months time. For Sirtex, there’s a very important post clinical trial study called the Sirflox study, that’s due in March next year. And for Mayne Pharma it’s getting generic approvals from the FDA.  
Lelde Smits: What should investors pay attention to when assessing clinical trial results?
Michael Glenane: It’s a very complex area; my first suggestion is read the announcement very carefully from the company. Then read it again, wait a bit, think about what really matters here because often you will see that the companies will put a positive spin on the trial results.
Lelde Smits: Have you sold out of any healthcare positions over the past year and why did you sell?
Michael Glenane: We’ve sold out of two positions over the past year. Last December we sold out of Acrux, the market teaches you humility that’s one we did get wrong.
We sold out of Ramsay about two months ago, and the reason we sold that is it moved too high as far as it was becoming too large, it moved outside our index so we had to sell it due to our investment mandates.
Lelde Smits: One of Australia’s largest private healthcare services Healthscope Limited (ASX:HSO) is set  to list on the ASX: What value does the company present for investors?
Michael Glenane: We’ve had a good look at Healthscope, to us it’s an earlier version of Ramsay which is a stock that’s made us very good money over a number of years. Unfortunately we had to sell, with regard to Healthscope it’s a fair way behind Ramsay with its Brownfield strategy, ie build more hospital beds and surgical theatres on side the same site.
As well as to do with its procurement strategy. Healthscope is probably able to extract another 50 points per annum of basis points margin simply on procurement and better buying. That’s the reason to look at that very closely. The question is what price should it trade as in its early days as a relisted vehicle. We would argue it should trade at a discount to Ramsay.
Lelde Smits: What is the best advice you could give to investors looking into the health care sector?
Michael Glenane: Investors are always paid to wait in healthcare. Don’t rush, don’t speculate. It’s very important to make sure that you’re looking at a stock for a number of years. Because they have a long time before they gestate towards sales. Big value drivers are when they start towards that particular sales curve.
Lelde Smits: Michael Glenane, thank you for the update from Fairview Equity Partners.
Michael Glenane: Thank you very much.

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