Portfolio Manager Stephen Yacktman of Yacktman Asset Management is pointing investors toward C.R. Bard, Inc. (BCR), a diversified medical device company with a consistent business that is set to grow faster than its competitors.
“The company’s medical device products are largely disposable, with most priced below $500. Unlike other medical device companies where products retail for tens of thousands of dollars, C.R. Bard is more like the consumer product company of medical devices. It’s a very consistent business,” Yacktman said.
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Yacktman sees unrecognized value in C.R. Bard as a result from a lawsuit that was settled in Bard’s favor. The company has been reinvesting the proceeds, giving it an edge against others in the industry.
“The lawsuit was settled successfully for C.R. Bard, and management has been reinvesting those proceeds into share repurchases and growth projects. These investments should allow the company to grow faster than other medical device businesses which have not invested as much in R&D and acquisitions. And so much of the industry is facing headwinds from the medical device tax, C.R. Bard has invested strongly in the face of these industry challenges,” Yacktman said.
Stephen Yacktman, Portfolio Manager at Yacktman Asset Management, says SYSCO Corporation (SYY) follows his principle of what makes a good business, and will increase its dominance in the food distribution industry when it combines with competitor US Foods.
“Sysco Corporation is the leading distributor of food products for restaurants, health care and educational facilities,” Yacktman said. “Sysco is combining with US Foods, one of its only remaining major competitors. And together, they will be the largest, by far, of any restaurant supplier.”
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Even though SYSCO experienced a pullback from the recession, it continues to have the prominent position in the industry, Yacktman says, which will only strengthen once the merger completes.
“During a recession, households struggle and people cut back on eating out. This pullback flowed through to Sysco, which saw margins compress and weak revenue growth. However, the company continues to have a dominant position in the industry, a position which will only increase if the proposed merger with US Foods is completed. It really follows our principles of what makes up a good business. We feel the management is fairly solid, and it sells at an attractive valuation,” Yacktman said.
Portfolio Manager Stephen Yacktman of Yacktman Asset Management has continued to hold Twenty-First Century Fox Inc. (FOX) after its split from News Corp., because its cable media side has been able to take market share and create value for advertisers.
“The piece of the business that really attracted us to Fox was the cable media side, which was a much smaller business when we started buying the stock. Cable advertising had historically been underpriced…and so Fox has been able to raise rates and continue to take market share. It’s just a really good business,” Yacktman said.
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Fox has been able to take market share on the cable news side because most broadcasters have a liberal bent, Yacktmans says. With Fox News having a conservative bias, it has little competition.
“The genius in Fox is there is no major competitor on the conservative side, so they have that area of the marketplace locked up, which results in high market share and a valuable channel for advertising. If companies want to reach that demographic, Fox is a good way to do it. And so it creates a good value for advertisers,” Yacktman said.
Sterne Agee & Leach Analyst Todd Hagerman recently downgraded Citigroup Inc (C) to “neutral.” He says Citigroup will struggle this year on the risk management front, and he believes the shares are range-bound in the mid-to-high $40s.
“Expectations were pretty high going into the Federal Reserve’s annual capital review program in which Citigroup had been quite conservative as it relates to distributing capital to shareholders to this point. So expectations were high that with the capital levels of Citigroup ranking among the highest in the industry that the capital return would increase pretty materially going into 2014 and the first quarter of 2015,” Hagerman said. “Unfortunately, the Fed failed them on the qualitative factors of their capital planning, so the planned capital return of roughly $6.5 billion didn’t quite come to pass.”
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Additionally, Hagerman says a $400 million fraud was discovered at Citigroup’s Mexico unit, and the Department of Justice and the New York U.S. Attorney General have opened investigations on the company. As a result of the risks Citigroup is facing, Hagerman doesn’t recommend buying the stock. But, he also isn’t advising investors to sell.
“But by the same token, when people ask why not a ‘sell,’ again, I think there is a lot discounted in the stock today in terms of very modest earnings expectations for the company as well as certain of the regulatory risk, so there is a lot discounted already,” Hagerman says. “By the same token, there are different schools of thought in terms of the size of the regulatory risk, the duration, and what it’s going to take to resolve or address some of these issues. And in my opinion, it’s going to take much longer relative to expectations.”
Ohio Legacy Corp (OLCB), which operates for the holding company of Premier Bank & Trust, recently expanded into Fairlawn, an affluent suburb of Akron, Ohio. CEO Rick Hull says continued expansion into similar markets would make sense for the company at this stage.
“We would certainly look at additional expansion further north into Summit County, almost into southern Cuyahoga County,” Hull says.
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But, he says the company doesn’t need a huge distribution network in order to serve its clientele, which is primarily wealthy doctors, lawyers, accountants and business owners. Technology like remote deposit capture and online banking enables Premier Bank & Trust to serve most customers with its existing footprint, Hull says.
“But we are always looking, as some of the larger institutions are closing branches. If we find there’s the appropriate opportunity to go into a market where we want to be, then we would be interested in exploring that,” Hull says. “I don’t think entering a market through a de novo banking office is a method we would prefer. I think there will be enough opportunity whether it will come by just the larger institutions getting out of a particular market, or one piece of a particular market, or consolidation of other community banks.”
Oppenheimer & Co., Inc. Analyst Boris Peaker says Keryx Biopharmaceuticals (KERX) is one of the companies he is recommending to investors, based largely on the company’s phosphate-binding dialysis drug. Peaker says Keryx’s drug is in a well-established class of drugs that is experiencing a unique opportunity in the current environment.
“The majority of dialysis patients are covered by the government, by Medicare, and dialysis is reimbursed on a fixed payment to provider for services and the injectable drugs that are incidental to the services,” Peaker says. “They get a fixed dollar amount, and if they have to use more drugs on the patient, it essentially comes out of their pocket.”
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As a result, Peaker says there has been a strong push in the medical community to minimize the use of injectable therapies for dialysis patients because of the financial disadvantage to the providers. Keryx’s dialysis drug reduces the need for injectables, which makes it attractive to dialysis clinics.
“Keryx’s drug is oral, and so if the dialysis clinic switches a patient to it, they actually benefit financially from the savings,” Peaker says. “Assuming approval, that makes this highly desirable now.”
Robert W. Baird & Co. Analyst Brian Skorney says there is a concern about pricing in the current biotechnology market. For example, he says there is “sticker shock” for oncology and orphan drugs, and if the government decides to push back on pricing for those drugs, he believes pricing will come down hard and fast. But, he said that is not the case for Cempra Inc (CEMP), which focuses on antibiotics.
“Antibiotics in contrast have already gone through that,” Skorney says. “Pricing has been decimated. Hospital administrations have really been able to leverage price down to very, very low levels, and we’re actually seeing the legislators out there in the U.S. trying to get pricing up and find ways to incentivize antibiotic drug makers.”
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Skorney says there has been a realization that antibiotic drug development and innovation has halted. If the pricing environment becomes increasingly difficult, he says antibiotic makers could thrive.
“You can do a decent valuation and be pretty confident in the price of a drug,” Skorney says. “Cempra is one of those; it has a late-stage antibiotic for community-acquired pneumonia.”
MannKind Corporation (MNKD) COO Hakan Edstrom says his company is “looking closely” at expansion opportunities in the pain management market.
“If you get the medication into the bloodstream very quickly, you also have a relief of the pain much, much quicker. There are also nonopioid opportunities, where you may even be able to treat patients for their pain without having the risk of them getting into situations where they are dependent on the drug itself because of the side effects,” Edstrom says. “That’s one area that we are looking into right now, and there are some others that I, unfortunately for proprietary reasons, cannot necessarily speak on at this point in time.”
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Edstrom says MannKind is still in the preclinical phase of its pain management research. He says the company has conducted feasibility studies, but not yet moved on to subsequent phases of research.
“We have had to manage our resources because AFREZZA has been such a major undertaking for the company,” Edstrom says. “We’ve had to be a little bit more conservative in the investment in other areas until we feel that we have a successful product on the market and a partnership, which is what we’re looking to with AFREZZA.”
Following recent approvals of ADASUVE, Alexza Pharmaceuticals, Inc. (ALXA) CEO Thomas King says the company is focusing renewed attention on developing new drugs. King says ADASUVE’s combination of an effective drug with the company’s Staccato system can be a model for changing other standard-of-care regiments. He says the Staccato technology’s speed, predictability and non-invasive delivery system make it ideal for treating acute and intermittent conditions that are dependent on speed and patient control.
“The next product in our pipeline is AZ-002, also known as Staccato alprazolam,” King says. “This product leverages the Staccato attributes, and we hope to see clinical evidence of its efficacy in treating acute repetitive seizures, which is an important subset of patients with epilepsy. We expect to start a Phase II proof-of-concept study with AZ-002 this quarter.”
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In addition, King says Alexza Pharmaceuticals is also investigating other products for possible clinical development. He sys the Staccato drug delivery technology will drive the product pipeline.
“So 2014 is exciting from a pipeline perspective, because for the first time in several years, we’re getting to put a product back into clinical development, and we look to see data from that clinical trial in 2015,” King says.
Dr. John Bonfiglio, CEO of Oragenics Inc (OGEN), says the company decided to license its LPT3-04 weight-loss compound to an outside third party.
“The Phase II trial did show a significant weight loss in some patients,” Bonfiglio says. “But given the focus of the company on ethical therapeutic drugs, at this point in time, we didn’t have the bandwidth or the resources to move that forward, so we have licensed that out.”
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Bonfiglio says that when he joined Oragenics in 2011, there were many different technologies under consideration. Bonfiglio says his strategy is to focus on antibiotics, which is the area where he believes the company can make the most progress.
“Because with our relationship with Intrexon, we not only have the lead compound that was discovered by us, but we have been able to generate a whole pipeline of new analogs of this lead compound, MU1140, that we believe have the possibility of being extremely helpful in the fight against resistant bacteria,” Bonfiglio says. “That’s one area where we think the value of the company would greatly be enhanced by the continued development of those products.”
