William Davidson highlights growing, but defensive, stocks

The healthcare sector is a curious beast. There is a wide spread of companies, from giants such as £3.5 billion Nycomed Amersham right down to tiddlers such as Surgical Innovations, 600 times smaller at £6 million. Some constituents are seriously profitable, others have never made a profit in their brief lives. And the diversity in what they actually do is very wide - from alternative wound healing methods to microbial testing kits to bed-wetting alarms.

The sector, disparate as it is, can be divided into two camps: medical devices, and testing and medical services. The first is the more varied, and also the harder to break into. As Seb Jantet from Granville Baird says, 'the risks are lower than with pure biotech and pharma plays, but the flipside is that it is very difficult to take the product from good idea to profitable product'.

'There is often a boffin in a charge of the product at the beginning - a man in a white coat with a great idea but no clue as to how commercialise this idea', says Janet. There are also lots of challenges relating to the distribution of the products, with group buying more prevalent in the US whereas in the UK it can also be risky because of government spending'.

Safe and solid?

Despite this, the healthcare sector is largely immune from economic cycles, and as such can provide some good defensive stocks. People do not stop needing syringes because of fears about credit crunches. On the other hand, some of the larger pieces of diagnostic equipment fall into the 'capital expenditure' category, and decisions to buy or rent these medical leviathans are probably less insulated from the general cycle.

So it appears to be a sector with the best of both worlds - defensive qualities as people are unlikely to stop needing medical assistance, yet growing as legislation becomes more stringent and medical advances mean that the population is alive for longer.

Take your pick

Advanced Medical Solutions appears to be a very interesting player. It has developed synthetic polymer technology for use in advanced wound dressings, based on the 'moist healing' principle. It has a market cap of around £17 million, and made a loss of around £5 million on sales of £6.22 million in 1999. House broker Granville Baird is forecasting a modest move into profits in the year to December 2002.

Also on the medical devices side is Ferraris. This medical and engineered products group is divided into Cardio-Respiratory, Vacuum Products and Engineering and Instruments. Profits and turnover have been rising swiftly over the last five years as the acquisition strategy pays off, and the market cap has risen fivefold. Products range from bed-wetting alarms and pain relief systems to asthma management devices. In the last year, it turned in profits of £3.5 million on sales of £38.4 million, and is on a forward p/e of only 13.1.

In a similar vein is devices business Gyrus, currently trading at 281p (£124 million). Headed by Mark Goble, Gyrus is focused on minimally-invasive surgery equipment based on radio waves. Turnover and market cap have rocketed in the last two years, with a loss of £3.2 million on turnover of £26.7 million in 2000. Broker forecasts for the current year vary from a big loss to a big profit, but the consensus p/e ratio for 2002 is around 49. The technology is used as a less traumatic alternative to hysterectomy, and has also been adapted to treat damaged knee cartilage.

A company that has recently been in the news is AorTech, currently priced at 410p (£124 million). The recent move from Aim to the Full List was a fitting end to a busy period for the Scottish-based developer of replacement heart valves. However, given the poor state of the market at the time of the move, the fundraising was scaled back from £64 million to £20 million. The proceeds from the placing and open offer will be used to advance R&D spending. Brokers are forecasting widening losses for the next two years as the expansion plans take their toll.

In the cleanliness/testing area is fully-listed BioTrace, which uses the same technology that lights up fireflies' bottoms. Its systems are used in the food service, catering and vending industries, and its customer base includes 19 of the top 20 food and beverage manufacturers. It is also set to benefit from heightened worries about environmental issues, as it produces a kit which tests the microbial contamination of waste water from industrial plants. Capitalised at £17 million, it sits on a forward p/e for this year of 13, falling to nine in 2002. The sector average is 24.

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