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The sudden collapse in Canadian health care stocks has created a buying opportunity, according to the managers of one of the country's best-performing mutual funds based on Morningstar rankings.

However, it's not the shares of former high-flyer Valeant Pharmaceuticals (VRX-T, VRX-N) that they are targeting. Instead, they've been adding to their fund's position in lower profile Concordia Healthcare (CXR-T, CXRX-Q), which they feel has been significantly oversold.

The sector was been battered after allegations of price gouging surfaced in the U.S. during the summer, abetted by comments from Democratic presidential hopeful Hillary Clinton. Valeant, which had traded as high as $347.84 in early August, fell all the way to $116.19 on Oct. 21. That represented a decline of about two-thirds in a little more than two months. The stock has since recovered some but is still trading at less than half its early August level.

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Concordia had a similar experience, although its plunge was faster and even more dramatic. On Sept. 8, it reached an all-time high of $117.75. By Oct. 21, it was down to $25.04, a loss of almost 79 per cent. It has since recovered and closed on Friday at $40, but that's still only a fraction of the September price.

Concordia and Valeant operate on similar business models. Both buy the rights to what are known as "legacy pharmaceutical products and orphan drugs" and assume manufacturing, distribution, and marketing responsibilities for them, sometimes at significantly higher prices.

The Canadian Press reported that the price of Valeant's congestive heart failure treatment Nitropress went up by 212 per cent on the day it purchased the rights to the drug from Marathon Pharmaceuticals. The cost of another heart drug, Isuprel, increased by a reported 525 per cent.

These stories, and similar ones relating to other pharmaceutical companies, have led to calls for an inquiry by senior Democrats in the U.S. Congress, prompting fears of price controls on pharmaceuticals down the road.

In their latest monthly commentary on the performance of their Aventine Canadian Equity Fund, which has a 6-per-cent position in Concordia, managers Jim Pottow and James Telfser wrote as follows.

"We find it pretty absurd that a campaign trail tweet from Hillary Clinton cost the biotech and specialty pharma sectors of the stock market over $160 billion in lost valuations. This is a clear case of a situation getting blown well out of proportion. We just don't see any real economic impact coming from this obvious politicking."

They described the stock as being "a solid value at current prices," saying they expect it to earn $8 a share over the next 12 months while generating $5 a share in free cash flow. "Based on a normalized valuation of 12 times, we see fair value for Concordia in the $95 to $105 range," they said. Earnings are enhanced by the fact the company enjoys a low tax rate in the 10 per cent range because some of its intellectual property is domiciled off-shore, Mr. Pottow said in a separate email exchange.

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Clearly, there is still a lot of uncertainty surrounding this whole situation but based on the recent rebound in the share prices of Valeant and Concordia the market appears to agree that the sell-off was overdone.

I'm not suggesting conservative investors buy in at this time because of the volatility and uncertainty surrounding the sector. But aggressive investors who are willing to take some risk in hopes of buying quality companies at a low price may wish to take a close look at the situation.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

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