Unknown Stock #1: A Tiny Pharmaceutical Company Treating A Widespread Problem

Does your stomach hurt occasionally? If not, your neighbours’ probably are. Possibly a co-worker or two as well. It’s not exactly the conversation you have with casual acquaintances… or anyone for that matter.

Despite its somewhat embarrassing nature, it is believed more than 20% of all Americans suffer from recurring stomach problems. If you take a visit to any drugstore, you’ll see the section on stomach medications is the largest in the entire store! You’ll see medications for IBS, constipation, gas, bloating, heartburn, diarrhoea, and on and on.

The doctors call these ‘gastrointestinal problems’ and often have a tough time diagnosing and treating these problems effectively. Many chronic sufferers are now told they have IBS- a ‘catch all’ for a number of different stomach ailments.

As you can see, this is a huge market.

“IBS statistics are sobering: An estimated 35 million Americans have the disease. It ranks second only to the common cold as a cause of lost work time and accounts for approximately 3 million physician visits in the United States every year.” – Today’s Dietician, February, 2003

Further, did you know in 2002 almost 400,000 people were hospitalized for constipation? Physician visits for this problem average 2.5 million per year. Can you imagine the number that never see a doctor because of embarrassment?

So what can we learn from these statistics?

Simply, millions of people need drugs to help treat these stomach problems. Current medications and treatments are just not that effective for the long-term recovery of most people with chronic stomach ‘issues’.

As such, there is a gigantic need for medicines that can help alleviate and cure these disorders.

One company we found in this area, Sucampo Pharmaceuticals (symbol:SCMP), develops and markets drugs to treat all of these problems and more.

Sucampo’s key product is AMITIZA. Doctor’s use it to treat constipation. The drug is also being used in Phase III clinical trials for treatment of IBS. The drug must work wonders- prescriptions for AMITIZA are increasing nearly every quarter.

And if AMITIZA is approved for the treatment of IBS, look out, revenues will skyrocket!

Now, constipation and IBS aren’t the only focus of Sucampo. They’re also working on drugs to treat other ailments such as ulcers, pulmonary disease, and even Alzheimer’s. This kind of diversity is good for a small pharmaceutical company. You never know where the next big drug breakthrough will come from.

Sucampo’s numbers are great already. They’ve got solid revenue growth, and are spending aggressively on Research & Development. In fact R&D spending has recently been increasing by over $3 million a quarter because of ongoing clinical trials. These R&D dollars are an investment that will hopefully pay big dividends down the road.

Year over year, the company’s growing revenues by over 12%. Not bad in a tough economic environment. They’re also sitting on over $100 million in cash, not bad for a ‘small’ pharmaceutical company..

Overall, we believe the company is well positioned for long-term growth. With one hot selling product and several more in development, it won’t be long before we see some serious growth. And with this serious growth, we expect to see some serious appreciation in the stock.

Unknown Stock #2: A Specialized Hospital Play on the Aging of American
“National health-care spending, which hit nearly $1.8 trillion in 2004, will increase as a percentage of GDP by 22 percent over the next 10 years. For that the health-care industry can thank the boomers, who are just beginning to enter the time of their lives when drug, hospital and other expenditures rise dramatically.” –CNN Money
It is estimated that between 1946 and 1964, 79.6 million people were born in the United States. These ‘Baby Boomers’ were conceived after World War II and represent the largest segment of the American population.

The effect this group of people is having on the economy is profound. Now between the ages of 45 and 63, the ‘Baby Boomers’ are getting to the age where medical and healthcare issues begin to take center stage. More and more of the boomers will want and/or need specialized surgeries.

This older group of people will need medical procedures that help them lose weight, replace joints, fix bad backs, deal with strokes, and reduce pain. And with the way the current healthcare system is set-up, many of them will look for better and easier solutions than what is ‘usually’ available.

This is where specialized-surgery hospitals like Dynacq Healthcare (symbol:DYII) come in. Dynacq is a developer and operator of acute-care hospitals in Texas and Louisiana.

These cutting-edge hospitals handle specialized surgeries in the orthopedic, bariatric, and neuro-spine disciplines. They’re typically part-owned by the surgeons who work there- giving them a vested interest in the success of the hospital as a whole.

We think you’ll start to see more and more of these ‘specialized’ hospitals cropping up all over the United States and the entire world (Dynacq has a joint venture in the works to build a hospital in Shanghai, China). Besides the immense benefits for patients, these types of companies are extremely profitable.

Dynacq has a profit margin of nearly 24% and enjoys quarterly revenue growth of over 12%. Virtually all of the financial metrics used to evaluate stocks are positive for DYII. They have a low price-to-earnings ratio, a low price-to-sales ratio, good free cash flow, and superior return on equity. They also have $32 million in cash.

Once Wall Street recognizes the impressive financial condition and performance of this company, I think you’ll see DYII shares really take off. There aren’t a lot of penny stocks that offer tremendous value, but I think Dynacq definitely is one of them.