Diagnostics - Doctor, doctor, is this a good investment?

There are other companies mentioned but I've just highlighted Mediwatch:

Article published 24th Sep by valueinvestor

Mention healthcare stocks and most investors will be looking at biotech for the best returns – make-or-break companies which will strike it rich if their drugs under development get through the FDA approval process. Income investors know the appeal of Astrazeneca and Glaxosmithkline, huge pharmaceutical companies with massive portfolios of relatively mature drugs.

Neither as risky as biotech tiddlers, nor as boring as the big drugmakers, the healthcare equipment stocks are stuck in the middle – and don't get a lot of attention. But they can get the same kind of growth rates as the biotechs – while several of them have the kind of earnings record that would make a big-pharma finance director nod in approval.

This week saw news that one in six NHS patients suffer misdiagnosis [1] . While technology can't solve every health problem, diagnostic technology has become increasingly accurate – and cheap; so I thought it would be a good time to take a look at some of the diagnostics stocks. There are quite a few.

Diagnostics appears to be relatively resilient in tough economic times. Testing is increasingly seen as a way to help manage healthcare costs, by identifying diseases early and addressing them before major intervention is required.

I particularly like the fact that some of these companies are establishing good barriers to entry. That's something Warren Buffett always looks for – he calls it a 'moat' around the company – and it could help the companies sustain their competitive advantage in the long term, which isn't always possible with drugs. Once the company has its equipment in the surgery, its future revenue stream of diagnostic tests is safeguarded, as it's not economically sensible to change the system

There are also opportunities for cross-selling new products using the same equipment at the point of care.


Another diagnostic company which looks like a potential fast growth stock is Mediwatch, a urological specialist. It was founded by CEO Philip Stimpson in 1996, and markets a prostate cancer diagnostic system, PSAWatch, for which it has now signed a global distribution agreement with US major, Inverness Medical Innovations. Its point-of-care product has real advantages against lab tests – results take 10 minutes rather than 3 days to arrive, and it's cheaper to use. That makes Mediwatch a possible beneficiary of cost cutting programmes in healthcare, rather than a likely victim.

The year to October 2008 saw Mediwatch increase its revenue by 64%, but more importantly make a profit of £408,000 against a loss of £256,000 the year before. It also saw positive cash flow – no longer burning cash as it had done the previous year [7] . Brokers' forecasts are for £620,000 pretax profit in 2009, growing to £1.2m in 2010 [8] – the shares trade on 22x historic earnings, but look much more realistically valued on a prospective basis.

Diagnostics - Doctor, doctor, is this a good investment?