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Holly LaFon
Holly LaFon
Articles (9583)  | Author's Website |

Ron Muhlenkamp's Q4 Memorandum - 'Game Changers in Biomedical Science'

November 05, 2014 | About:

Tammy Neff

Advances in biomedical science continue to transform the way medicine is being practiced. Since the 1950s, we have experienced a steady stream of breakthrough innovations, ranging from vaccines for the masses to precision medicines based on one’s unique genetic makeup. In a 50-year span, we’ve gone from characterizing the double-helix structure of DNA to a complete mapping of the human genome. Hand-in-hand with this increased understanding, scientists are developing “next generation” therapies in a more efficient and effective manner. For some consumers, the widespread accessibility of new treatments won’t come soon enough. Investors, however, can begin participating now—and, if you are one of our clients, you have been participating.

As a consumer, we’re living in an era of near optimal diagnosis and treatment to manage most diseases. There are specialists, high-tech diagnostic equipment, and treatments for just about everything that ails us: orthopedic surgeons who perform hip and knee replacements, surgeons who use robots to assist with procedures, and oncologists who prescribe medicines that target cancer cells, while sparing healthy ones.

But we still don’t have all of the cures…

Historically, in response to ailments, doctors would prescribe a course of action to diagnose and treat what is wrong. While the predominant model of healthcare remains curative, advances in biomedical science are shifting this model of care toward one of probability, prevention, and personalized medicine. Today, there are genetic tests for a variety of diseases. For example, the BRACAnalysis® is a genetic test that confirms the presence of BRAC gene mutations associated with future development of a specific type of breast and ovarian cancer.

“Providing doctors and patients (“consumers”) with more effective treatment options and improved outcomes is the goal of personalized medicine.”

Genetic testing is also available for other types of cancer, including prostate and thyroid, just to name a few. The Prolaris® test measures the level of genes involved in prostate tumor proliferation. This test helps doctors determine disease aggressiveness, as well as prescribe personalized treatments. The Afirma Thyroid FNA Analysis®, a 142-gene expression test, allows doctors to determine if the thyroid nodules in question are benign or cancerous. This test can prevent unnecessary invasive surgery, along with life-long thyroid replacement medication.

When cancer is detected, diseased tissue and blood can now be analyzed using next-generation genomic sequencing technology. As an example, the FoundationOne® test decodes a tumor’s DNA, compares it with all genes known to be relevant in human cancers, and matches any mutations with known targeted cancer therapies. This is significant because, historically, cancers were categorized and treated based on where they occurred in the body: lung, breast, colon, pancreas, skin, blood, etc. With advances in biomedical science, cancers are now being categorized and treated based on their underlying genetic mutations. Providing doctors and patients (“consumers”) with more effective treatment options and improved outcomes is the goal of personalized medicine.

As biomedical companies work to develop and deliver new products, investors have more choices. Publicly traded companies run the gamut, each with their own risk/return profile:

  • Small, start-up “R&D” companies with few or no FDA approved products and little to no revenues or earnings;
  • Mid-sized companies with niche FDA approved products and modest revenues and earnings; and
  • Mature, fully integrated global companies, with multiple FDA approved products that are profitable.

To narrow our universe, we are focusing on those companies that we think will ultimately provide cost savings to the healthcare system through the following game changers:

  • Transforming the model of healthcare from disease management to disease prevention through personalized medicine;
  • Rethinking the approach to the war on cancer; and
  • Curing diseases that were previously life-long conditions.

"Short term, the stocks of such companies may trade on daily “headlines.” Longer term, we believe they trade on business economics. So our goal remains the same: buying Cadillac companies at Chevy prices—good companies at cheap prices."

Short term, the stocks of such companies may trade on daily “headlines.” Longer term, we believe they trade on business economics. So our goal remains the same: buying Cadillac companies at Chevy prices—good companies at cheap prices. Our primary screening metric is return on shareholder equity (ROE), but we also look for companies with solid balance sheets, positive free cash flow, and sustainable revenues and earnings growth. We are also mindful that you can turn a good company into a bad investment by paying too much for it. So, when it comes to price, we like companies that trade at a price-to-earnings ratio (P/E) that is less than its ROE. We are willing to pay up for growth, but we must have conviction in their underlying story—dig deep into the scientific insights and business environment in which they operate.

There are dozens of biomedical companies with promising science, but no earnings or return on equity. To take advantage of their potential, we own a couple of global companies that collaborate with “new frontier” ones. This permits us to participate in the upside and limit the downside—allowing our clients (and us) to sleep at night. One such company is Celgene (NASDAQ:CELGZ). In addition to FDA approved products for the treatment of cancers and immune disorders, Celgene has multiple partnerships that furnish a broad and deep pipeline of cutting-edge compounds that are in clinical research trials.

Finally, while we don’t believe that a holding period of “forever” is appropriate in all cases, we are comfortable holding companies as long as they continue to meet expectations.

To learn more about the advances in biomedical science and how you, our clients, are participating in related investment opportunities, join us on November 12, 2014 at our next investment seminar. (Details are included on the backside of this newsletter.)

Holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.

Earnings growth is not a measure of the Fund’s future performance.

Tammy joined Muhlenkamp & Company, Inc.in September 2003. Her responsibilities are primarily research oriented, including evaluating company financial statements, annual reports, and proxy statements; analyzing industry and company research reports; interviewing and visiting company management teams; and making investment recommendations for inclusion in the Muhlenkamp portfolios.

Tammy has 14 years of experience in the healthcare industry as a Psychiatric Nurse Clinician and Healthcare Administrator. Before joining Muhlenkamp & Company, she served as Director of Operations for the University of Pittsburgh, Department of Psychiatry Faculty Practice Plan.

Tammy received a dual Bachelor of Science in Nursing and Psychology from Carlow College in 1989. She completed a Master’s in Business Administration from the University of Pittsburgh in 1994. Tammy holds a Chartered Financial Analyst (CFA) designation and maintains Series 6, 63, and 65 securities registrations.

About the author:

Holly LaFon
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website


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