Is it time to buy Somnomed Limited and Acrux Limited?

These healthcare businesses have been attracting investment analysts’ attention.

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Sleep disorder device maker Somnomed Limited (ASX: SOM) has ambitions to become the next ResMed Inc. (CHESS) (ASX: RMD), even appearing to adopt a similar name to Australia’s most famous sleep disorder specialist. While snoring is not the most seductive investment topic, it seems there’s potentially big money to be made treating it and related problems.

SomnoMed is growing product sales across the Americas, Europe and Asia Pacific region. The key differential to ResMed is that SomnoMed’s mouthguard-like devices are relatively non-intrusive to use, whereas the main therapy for sleep apnoea treatment currently is continuous positive airway pressure (CPAP), which requires a face mask to be worn by users. The majority of SomnoMed’s business comes via dentists, and the company excites investors because it may be that an increasing number of sleep apnoea patients choose to use the more convenient mouthguards over the face masks. The other key appeal is that the mouthguards are generally cheaper than more traditional CPAP treatment options.

At the end of the first half of the 2014 financial year SomnoMed had a cash balance of $4 million to fund its sales and marketing push in North America, although no dividends have been declared as the company prefers to invest for growth. Selling for $1.43 it trades on a price-earnings ratio of 89 based on an estimate of earnings per share (eps) of 1.6 cents for financial-year 2014. If the company is able to grow margins and revenues as it hopes then eps will rise rapidly off a small earnings base. Somnomed looks a speculative buy based on its potential to rapidly grow sales in an expanding market.

Other smaller healthcare stocks looking to grow sales include Sirtex Medical Limited (ASX: SRX), Mayne Pharma Group Ltd (ASX: MYX) and Acrux Limited (ASX: ACR). Acrux is a testosterone therapy producer that has seen sales of its key product, Axiron, fall on the back of a health scare in its key North American market. However, a U.S. Food and Drug Administration announcement on June 19 that it would require wider health warnings on FDA-approved testosterone products appears to have helped Acrux’s share price recover from very low levels. However, this warning is not related to another ongoing testosterone therapy investigation, and the next key numbers for Acrux will be Q2 2014 sales figures likely to be released in late July. The old adage that sex sells means the global testosterone replacement therapy market remains extremely lucrative for any business able to capitalise on it. Acrux also offers tax free capital gains and looks a speculative buy based on its potential to ride out potentially short-terms issues and start growing sales again.

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Motley Fool contributor Tom Richardson owns shares in Sirtex, Resmed and Acrux.  You can find him on Twitter @tommyr345

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