What's the Future Like For Health Care?

The health care sector is a varied space with multitudes of job types and functions. From health care insurance to medical technologies, the health care space contains mature industries as well as volatile industries.

The pharmaceutical industry is fairly volatile, depending on which company you are talking about. Pfizer PFE and Merck MRK are companies with large patent portfolios, and future growth will be limited due to diminishing marginal returns. Even if they release a new blockbuster drug, mature pharmaceuticals have such a diluted patent portfolio that EPS and revenue growth will increase marginally. Small-cap pharmaceuticals, on the other hand, are incredibly volatile due to the small number of intellectual property. Some fail miserably in an attempt to find the next big drug while others succeed and multiply shareholders' value innumerably.

SciClone Pharmaceuticals SCLN is a US –based, small-cap pharma that focuses on manufacturing and distributing medications in China. If investors are considering a position in a unique pharmaceutical firm, SciClone may or may not be a good fit.

The acquisition of NovaMed is paramount to the company's recent performance. To learn more about the strategy, Benzinga reached out to Hamed Khorsand at BWS Financial.

According to Khorsand, the synergies incurred are primarily as a result of "NovaMed's reach in China. NovaMed had a sales force of 400 people that successfully marketed drugs across China, and were higher up on the hierarchy of pharmaceutical sales. Moreover, SciClone was investigated by the SEC for bribery allegations, and acquiring another company was very helpful."

Apparently, "NovaMed's patent portfolio gave SciClone a large pipeline of drugs. Ultimately the vast expansion of the sales team increases its scale and ability to garner revenues."

Although the company stands to gain significantly from the acquisition, Chinese stocks tend to have lower price/earnings ratios. As such, Khorsand "set a price target of $4.50. If the company's operations were not so concentrated in China, then it may be a different story, but the price does not have much room for growth given current operations."

In the last quarter, EPS dropped from $0.08 to $0.03. When asked if the transaction will ultimately be accretive to SciClone's earnings, Khorsand stated that "revenue streams are growing and it's only a matter of time before EPS catches up. However, the Chinese government maintains tight control over its companies, and if they create regulations that restrict revenues, then the company's EPS may drop further."

The company's recent financials statements show various trends of the acquisition in a clearer manner.

The company's operations have been following an interesting trend over the last few quarters. In terms of revenues, the last quarter had the best performance. However, operating expenses, especially SG&A expenses (salaries are typically included in this line item), increased significantly. In fact, they single-handedly decreased net income to the lowest levels in the past five quarters. The biggest reason for this may lie in the fact that the company acquired NovaMed earlier in 2011.

Current assets, including cash dwindled in the last quarter. Again, the acquisition may be the primary culprit for this trend. On the other hand, receivables increased from $21 million to $38 million, which means that cash flow is not as high as it could be. On the other hand, accrued liabilities and payables increased, which frees up some operating cash. Lastly, deferred tax liabilities occurred in the last quarter, which means that the GAAP and Tax Code discrepancies will have to be paid off in the future. This essentially adds unnecessary expenses.

Apart from working capital, cash decreased due to acquisitions, which affected cash flow from investing activities. Moreover, the company issued $5 million of common stock in the last quarter, increasing its cash position slightly. Net net, the company lost about $6 million in cash.

SciClone may be an interesting play for some investors who are interested in non-traditional pharmaceuticals. It has a high return on equity, virtually no debt, and high revenue growth. However, some analysts think that its share price does not have much room to grow. Investors should look into the company more and see if its recent acquisition ultimately added value to its operations.

Currently, SciClone Pharmaceuticals is trading at $4.49, up about 15.6% in the last year.