As a value investor, and contrarian, I am attracted to companies, sectors, and industries, that other investors are currently afraid of. This lead me to the Health Care sector and United Therapeutics Corporation (UTHR). At today’s price in the current market conditions, is United Therapeutics going to outperform the market over the next 7-10 years?
“Value investing is at its core the marriage of a contrarian streak and a calculator,” Seth Klarman
United Therapeutics is a mid-cap biotech company with a market cap of about $4.86 billion that develops and sells drugs treating chronic and life-threatening diseases. The stock is currently trading just above its 52-week low of $107, and well below its all-time high of $188, at about $111. Over the past five years the stock is up about 82%.
Competitive Advantage(s) and Catalysts
The company owns a patent portfolio protecting its most valuable products, they dominate a niche market, they operate in an industry with high barriers to entry, and they have an intriguing growth opportunity lurking.
Their patent portfolio is currently a competitive advantage as it stands, but investors must be aware that this competitive advantage is not durable, and will be removed at the expiration of their patents if they are not replaced with equal (or better) quality patents.
They operate mainly in a niche market focusing on the treatment of Pulmonary Arterial Hypertension. According to Million Insights, the Pulmonary Arterial Hypertension market is expected to grow annually by about 5.7%, from $5 billion in 2015 to $8.7 billion in 2025. Their niche focus has allowed them to become a dominant player in this market, and their continued focus will allow them to benefit from the growing market. This focus has also allowed United Therapeutics to efficiently control its R&D costs and significantly outperform the industry in multiple key operating metrics.
Source: Graph, self-created. Data, TDAmeritrade/FactSet
On the surface, it may not seem that there are high barriers to entry when it comes to biotech, as there are new companies popping up frequently. However, when you think of it from a regulatory perspective, there is quite high barriers to entry. Not only is it difficult to obtain regulatory approval for new drugs, but it would be very difficult to challenge United Therapeutic’s dominate market share position. It would take significant capital and resources to challenge United Therapeutic’s current market share, limiting the number of potential competitors.
United Therapeutics also has an intriguing growth opportunity underlying their normal business model. They acquired a company that once cloned a sheep (it sounds kind of crazy, I know), and is now focusing on creating an unlimited number of organs that can be transplanted. Their subsidiary is currently the early leader in an estimated $100 billion industry. It is very early on for this industry and company, but is certainly an intriguing area to look towards for growth. It is speculative and a long-term play, but this could prove to be a large catalyst for the company.