2 healthcare stocks that could make huge moves in 2016

Credit: Pictures of Money

In any sector of the share market there is always a clear division between the “front page” stocks, the businesses occasionally covered on pages 4-10 and the complete unknowns that don’t get written about at all.

We all know the top two or three companies in each sector, but if everyone could beat the market by investing in those stocks, then there would be no need for The Motley Fool!

So here are two businesses with sound business models that have the potential to grow not just in 2016, but well into the future.

CogState Limited (ASX: CGS) is a company that provides cognitive assessment and training for a range of industries. Some investors may be familiar with the activities of the company in relation to their concussion tests that are administered to elite footballers if they sustain a head knock.

However, over 95% of the revenue of the company comes from the far larger and more attractive clinical trials business segment. The segment creates and rolls out cognitive assessment tests backed by science that can be delivered on simple tablet or computer screens.

The tests measure the full cognitive functions in tested patients. The application of this methodology is wide ranging and lucrative. For example, the company could provide its Cognigram product to a pharmaceutical company seeking to conduct a clinical trial on the efficacy of its Alzheimer’s or dementia medication.

The attractive thing for CogState is that these tests are crucial and essential, but not leveraged to the success or failure of the trial. In addition, the company has a record pipeline of contracted clinical trials, with revenue totalling $35.4 million, compared to $21.2 million for the previous year.

The company has also committed additional resources to its direct sales force, which has helped drive a record number of prospects into the sales funnel, and it has relationships with over half of the largest 25 pharmaceutical companies in the world.

Lifehealthcare Group Ltd (ASX: LHC) is slightly different from CogState in that it deals with tangible goods, or hardware, rather than software. More specifically, Lifehealthcare is an importer and distributor of high-end medical devices and implants.

If that doesn’t sound particularly complicated, you’d be right, it’s not. But the real competitive advantage for the company is in the relationships it has built with its customers, and the talent of its sales force.

In this kind of business, the “customers” are the surgeons who operate on patients. Lifehealthcare markets its products to surgeons who then use them in their operations. Each surgeon who chooses a Lifehealthcare product over that of a competitor represents an additional revenue stream for the company. To speak to surgeons effectively, the sales force needs to be credible, well informed and reputable, which is the reason that these staff members are highly valued and not easily replaced or replicated by a competitor.

The focus on recruiting quality staff and allowing them to build relationships with surgeons over a long period of time has allowed Lifehealthcare to build the total number of active surgeons from 52 in 2010 to 96 this year. In addition, the revenue per active surgeon has grown from $270,000 per year to $452,000 per year.

Lifehealthcare also imports a relatively non-discretionary set of products, which means it is protected to some degree from the impacts of a falling Australian dollar.

Both CogState and Lifehealthcare have strong exposure to the growing amount of money that will be spent on healthcare in the coming years and decades. Cogstate has far more “blue sky” potential, while Lifehealthcare is the kind of business that will continue to steadily grow earnings over time.

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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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