From his Fifth Avenue office in New York, David Talbot runs a Luxembourg-based fund, mainly for offshore clients who want to invest in U.S. equities. Talbot's specific targets: stocks that will benefit from the fast-changing health-care environment.
Don't bother with big drug houses, says Talbot, president of HealthReform Partners. The best bets are lesser-known companies with a "growth rate of 25% to 30% and price-earnings ratios below those expected growth rates." Such stocks, he says, are likely buyout targets for pharmaceutical companies seeking nondrug but health-related outfits, such as makers of diagnostic or medical devices.
Lunar (LUNR), which produces densitometers used in diagnosing osteoporosis, or bone deterioration, is one of those stocks, Talbot believes. It has a joint venture with Merck, which makes a prescription drug that treats osteoporosis. The Merck-Lunar venture helps finance the sale of Lunar's densitometers to doctors and hospitals. Sandoz recently won approval for its own drug for osteoporosis. "So there is an interesting triangle with respect to Lunar's densitometer, and Lunar can only be the winner," says Talbot. Quite logically, Merck and Sandoz could vie for Lunar, says Talbot.
Staar Surgical (STAA) is also on the cutting edge of reducing health-care costs, says Talbot. It makes intraocular lenses for micro-incision eye surgery. Some pros say Staar is an ideal target for Johnson & Johnson.
MidAtlantic Medical Services (MME) is a health-maintenance organization that Talbot thinks is attractive to insurers like Aetna, as well as to other major HMOs. MidAtlantic serves self-insured employers, indemnity carriers, and multi-state employers. With reforms sure to hit Medicare, "that area will be the next big profit opportunity for efficient HMOs," Talbot says.
MedCath (MCTH) "is the most exciting stock in my list," says Talbot, because it directly challenges hospitals on costs. In McAllen, Tex., it has a center for cardiac-bypass surgery that's owned in part by several doctors. "The center performs cardiac surgery at one-third the cost hospitals charge," says Talbot. MedCath is putting up other "heart hospitals" in Arizona, Arkansas, and North Carolina.
Talbot also likes Hafslund Nycomed, a Norwegian company whose American depositary receipts trade on the Big Board, since it announced plans to spin off its energy division, thus creating shares in two companies. As a result, Nycomed will be strictly a pharmaceutical company.