2 best healthcare stocks to buy now

A manufacturer of higher-value, higher-margin edible, vape and beverage products and a provider of incision-free therapies for the treatment of prostate cancer are “strong buys”.

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Raymond James analyst Rahul Sarugaser names two Canadian healthcare stocks as “strong buys”.

Before this year’s stock market correction, the cannabis industry suffered a “bloodletting” in late 2019 due to poor financial results and uncertainty about when the next phase of product introduction would start, Raymond James Financial analyst Rahul Sarugaser had commented then. Since the dust has settled, however, he can think of at least one pot stock that investors may want to pick up for themselves.

Residing in Toronto, Mr. Sarugaser is a managing director and equity analyst at Raymond James responsible for medical technologies research. Prior to joining the firm in 2019, he worked as an equities analyst at Paradigm Capital specializing in healthcare and biotechnology coverage. The analyst has spent years working in areas where finance and science are tied, fittingly, considering his scientific bona fides, which include a master’s degree and doctorate in biomedical engineering from the University of Toronto. He also holds an MBA from the University of Oxford.

Mr. Sarugaser names medicinal and botanical drug manufacturer Auxly Cannabis Group Inc. (TSXV—XLY) as a “strong buy” selection among the healthcare stocks that he covers for Raymond James.

The analyst underlines Auxly’s deft focus on moving toward the ‘Cannabis 2.0’ market (that is, products derived from processing cannabis, not simply dried flower) along with its flagship partnership with international tobacco firm Imperial Brands PLC, as the basis for his long-term conviction on its success.

Cannabis crop will feed up-market products

On June 15, the company announced that its 51-per-cent-owned joint venture with Sunens Farms Inc. has secured a cultivation licence from Health Canada for the first phase of its 1.1-million-square-foot greenhouse facility in Leamington, Ontario. This first phase includes roughly 360,000 square feet of now-licensed cultivation, processing and storage space. “According to our calculations—based on average industry cultivation efficiencies—this licensed footprint could yield up to 18,000 kilograms of cannabis per year, which, if all sold as flower, would have a value of around $50 million,” the analyst explains.

“That said, we expect Auxly to use the low-cost biomass secured through its Sunens off-take agreement to further empower its campaign in the Cannabis 2.0 market; we expect the company to convert the majority of this biomass into higher-value, higher-margin edible, vape and beverage products for the Canadian cannabis market. The receipt of this licence is an important milestone for the company as it provides Auxly with its own source of high-quality, cost-effective organic cannabis as feed-stock for its expanding Cannabis 2.0 portfolio.”

Additionally, as of press time, Auxly’s stock had slipped roughly 20 per cent since the beginning of June, near its two-year low notwithstanding the mid-March COVID crash; by comparison, the broad-based Horizons Marijuana Life Sciences Index ETF (TSX—HMMJ) fell just two per cent over the same period. Mr. Sarugaser argues the stock’s recent trajectory is disconnected from Auxly’s strong fundamentals, adding he views the current trading price as a good entry point to buy in.

Prostate cancer treatment cleared in US and Canada

On a rather different note, the analyst notes that the European Association of Urology (EAU) has published abstract models to be presented at its annual (virtual) congress between July 17-26. Two of those models highlight the clinical utility of the TULSA-PRO device, designed by Mr. Sarugaser’s second “strong buy” pick, Profound Medical Corp. (TSX—PRN; NASDAQ—PROF).

PRN’s TULSA has been cleared by the US FDA and Health Canada for “ablation of prostate tissue” and remains Mr. Sarugaser’s treatment of choice. TULSA’s primary use is focused on localized, intermediate-risk prostate cancer, where the cancer is progressing such that active surveillance (watching and waiting) is no longer an option. This represents a total addressable market (TAM) in the US of roughly 200,000 patients per year.

“These data being presented at EAU, however, demonstrate much-expanded utility of TULSA into both the more benign end of the market with benign prostatic hyperplasia (BPH) and into the more severe end of the market, which are salvage patients, that is, patients that have experienced disease recurrence following other treatments,” the analyst says.

In the US alone, roughly 14 million men suffer from BPH, for which urologists are beginning to view TULSA-based intervention as appropriate for very severe cases. Mr. Sarugaser estimates them to be roughly five per cent of cases, or about 700,000 patients. Salvage-stage prostate cancer affects 15 per cent to 40 per cent of radical prostatectomy patients who will experience cancer recurrence within five years, representing about 50,000 new patients in the US per year. “As such, the potential expansion of TULSA’s application into these new clinical contexts increases PRN’s TAM from its current approximately 200,000 patients to 1 million patients, a five-fold escalation,” says Mr. Sarugaser.

This is an edited version of an article that was originally published for subscribers in the July 3, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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