A Rothschild Pigeon for Health Care Investors
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
Ever since the Rothschilds used pigeons to ferry home the results of Napoleonic battles and made fortunes off the news, investors have looked for that extra bit of information that might give them an edge. Especially in fast changing areas like technology or health care, having an inside track on revenue growth or new product development can be extremely valuable.
In the pharmaceutical arena, two entrepreneurs are delivering what they consider to be proprietary information about drug sales and efficacy. Joseph Grace and Keith Pride have teamed up to create MDRxFinancial, a broad-based medical products information service exclusively designed for investment organizations. According to the founders, they keep tabs on more than 40,000 drugs. Not only is the information collected in a timely basis, but it can be sorted and analyzed by investors in a hundred different ways. Their subscribers, mostly hedge funds, pay a small fortune for access to the data.
The information is exceptionally detailed. You can find out how many prescriptions are being written for a specific drug, what dosages are being prescribed, changes in indications for individual drugs, or how wholesale, Medicaid, or co-pay prices are trending. The founders also offer information on what doctors are saying about various drugs, how patients are responding, and how the drug is being bought. They also can predict, based on the data collected, what a given company’s revenues will look like for each product line, and they project earnings as well. They can even highlight how their projections, based on the gathered data, differ from the consensus among Wall Street analysts.
Is the information important? For sure. Recently, for instance, the firm discerned that the drug Vancocin, produced as an oral capsule by Pennsylvania-based ViroPharma (VPHM $19), was selling better than most analysts on the Street thought. Most investors were tracking prescriptions being filled by pharmacies. The MDRx folks figured out that the drug instead was being sold through hospitals, and that sales were going very well indeed.
The stock, which was trading at less than $5 a share at the end of May, has quadrupled since, mainly on the strength of its expanding Vancocin success. It’s a reminder of the value of proprietary information.
How does MDRx gather the data? They receive information from doctors, clinics, hospitals, pharmacies, and numerous other sources. Gathering the data was the brainchild of Joseph Grace, grandson of the former chair man of W.R. Grace, who started a survey company in 1996. The company regularly receives information from questionnaires sent to some 5,000 doctors, but has a database of 20,000 that can be called upon for particular information.
MDRxFinancial also collects prescription information from more than 3,000 pharmacies and drug wholesalers, gathering data days (and sometimes weeks) ahead of their competitors, and an oncology database that represents some 10% of drugs sold to cancer patients in America. The team can provide specialized information for their clients, and create surveys on topics of interest within one or two days.
It should be noted that MDRx is not the only firm selling prescription information to investors. IMS Health (RX $25) is a global company providing market data to pharmaceutical companies, with revenues last year of $1.72 billion and a market cap of $5.8 billion. Another company in this space is NDC HealthCorp (NDC $19), with revenues of $397 million and a market cap of $692 million. Both companies, however, are set up to serve the health care industry. Though they offer much of the same raw data, they do not have the investor-friendly analytics platform of MDRx.
There are also some investors in the sector that do their own research. Sectoral Asset Management’s Stephan Patten considers access to his company’s inhouse Scientific Advisory Network particularly valuable. Mr. Patten manages the Quaker Biotech Pharma Healthcare Fund (QBPAX $13) out of Montreal.
Mr. Patten invests primarily in midcap biotech companies, and manages a concentrated portfolio of only 25 to 40 names. He takes both long and short positions – the only biotech mutual fund we know of with this capability.
Though the fund has beaten the Nasdaq biotech index since its inception in the final quarter of 2002 (up 13.1% vs. 11.9%), of late performance has been subpar. For the year to date the fund is up only 1.3%, compared to 1.9% for the index.
The portfolio managers at Sectoral Asset Management, which specializes in pharma investments, rely on a stable of eight well-positioned doctors to keep them abreast of industry trends worldwide.
Information about the sales of new products, for example, could be crucial. One of the stocks Mr. Patten considers attractive at the moment is CoTherix (CTRX $12).The company has recently launched, in partnership with Respironics (RESP $38), a portable inhalation device to deliver the drug Ventavis, prescribed for patients with pulmonary arterial hypertension. The contraption is small enough to be carried in a purse, and is viewed as a major advance over the prior delivery unit, which was approximately the size of a backpack, Mr. Patten says.
The doctors on the Sectoral team will no doubt be asked to monitor in coming months the sales of the new device, to maintain confidence that the stock, currently selling at nearly 27 times revenues, is still attractive.
In the meantime, building in-house sources tends to be expensive. Mr. Patten, whose fund carries an expense ratio of 2.31% compared to a sector average of 1.82%, might find the MDRx approach appealing.
We have no doubt that if Mr. Price and Mr. Grace can deliver the kind of competitive edge they believe that their information offers, Mr. Patten will be only one of many who will find his way to their door.