Q4 Share Price Performance in 2017 - Part 1

Q4 and 12-Month 2017 Share Price Performance for the Canadian Healthcare Sector: Healthcare Smoked by Cannabis

• Healthcare sector investors would usually be pleased by the 15% average annual share price increase but they undoubtedly cast envious glances at the 229% increase for the cannabis sector
• The share price increases in both sectors occurred predominantly in Q4
• Tier 2 small cap companies were primarily responsible for the healthcare sector increase
• Volatility, as measured by the number of companies with share price changes greater than 40%, was very high in 2017 – 53 companies or 46% of the 115 healthcare companies – and was up in Q4 (31 companies) vs. Q3 (23 companies)

After pardoning the pun in the blog title, healthcare investors should consider any potential impact the share price performance of the 50+ public Canadian companies in the cannabis sector can have on Canadian healthcare stocks. The retail investors and small cap fund managers who have invested in the cannabis sector, including numerous IPOs, may have reduced the amount of potential funding for other junior companies, including healthcare. If there is a correction in cannabis company valuations, will that have any impact on healthcare funding or valuations?

The eighteen companies with share price doubles in 2017 are listed in the table below along with my short comment on why I think they doubled. In three cases, the reason was movement up from a low on minor or no news. In another three cases, the movement was based on a link to the cannabis sector. In the remaining twelve cases, there was a news-based reason. There are other companies which had doubles over a shorter period in 2017 but did not have a double for the full year.

For most of my personal biotech investing, I look for potential doubles in the next 12 months based on positive clinical data, share price bounces from lows or continued upward momentum – these are just my personal investing preferences and not a recommended strategy for anybody else. Based on my list of preferences, I would have missed the following:

• all the increases based on financial improvements;
• all the increases based on partnerships because those events are not predictable;
• any of the companies with poor liquidity; and
• the cannabis-related companies.

I have a series of questions which I always ask about upcoming clinical data, including the following:

• When will the clinical data be available?

The investor is totally dependent on the company for this kind of information. In some trials, the company announces when the last patient is enrolled and how long that patient must be followed before the data is finalized, leaving a short time for the company to acquire and assess the top-line results. In the case of the Resverlogix Phase 3 trial of apabetalone, the study is an event-based trial and continues until 250 narrowly defined clinical events have occurred. Resverlogix has periodically announced enrolment data and DSMB ‘continue as planned’ reviews.

• How often is the clinical data positive?

About 10% of drugs which enter clinical trials are eventually approved, with a range of about 5% to 20% depending upon the clinical indication. There are certain clinical indications for which there have not been any recent Phase 3 successes, such as Alzheimer’s.

• Should you sell before the data?

If I have a double before the data, I sell. This is strictly my personal preference. If the share price has not increased on the expectation of data, I always wonder whether the market will react negatively to good but not great data.

An investor should always ask ‘how does the average share price change compare with other benchmarks?’

U.S. markets will sometimes drag the Canadian indices along for the ride, up or down. Volatility of the S&P 500 as measured by the VIX is at its lowest recent levels and the US markets have continued churning to all-time highs in the first few days of 2018. There are no U.S. trends which indicate investors are becoming more risk averse and money is moving out of equities. One event – the J. P. Morgan healthcare conference in San Francisco the week of January 8^th – and the resulting outlook for the healthcare sector by the major U.S. fund managers may have a short-term impact on the Canadian healthcare sector.

This is my final blog series looking at share price performance in the Canadian healthcare sector, which I started assessing in 1992 as a stock analyst with Deacon BZW. Investors have wildly different and constantly changing investing styles and risk profiles. I invest in some of the long-term care companies for their stable businesses and their dividends/distributions as a source of income. I invest in other stocks for capital gains, for which I am willing to take the loss from negative news. Development stage Canadian healthcare companies generally rely upon institutional investors for funding and retail investors for liquidity between deals – I look for opportunities from both deals and market purchases.

The share price changes which I have summarized and assessed each quarter reflect retail trading, general sector sentiment, broad stock market trends and, most importantly from my perspective, corporate events and performance. I have not changed my opinion that investors are probably going to have to pick individual winners in Canadian healthcare – whether you choose to bottom-fish, look for near-term events or expect improved financial performance. Get information, get help, ask questions and never forget these cautionary words which appear in many offering memoranda – this investment is risky; don’t invest unless you can afford to lose all the money you pay for this investment.

In the next blog, I will assess the Q4 and 12-month 2017 share price performance of the Tier 1 Canadian healthcare companies.

[The author and his immediate family members may have long or short positions in the shares of some companies mentioned in or assessed during the preparation of this blog. Past share price performance may not be an indicator of future share price performance. This blog does not consider the investment objectives, financial situation or particular needs of any particular person. Investors should obtain professional advice based on their own individual circumstances before making an investment decision.]

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