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Farewell CML: Pickings slimmer among TSX-listed health care stocks

LifeLabs Medical Laboratory Services, a private company, is about to officially absorb dividend-paying rival CML HealthCare.

DARRYL DYCK/The Globe and Mail

On Tuesday, one of Canada's handful of big-cap, dividend-paying health-care companies will cease to exist as a standalone entity, when CML HealthCare Inc. is officially absorbed in its private rival, LifeLabs Medical Laboratory Services.

The $1.2-billion takeover of the medical lab testing company – first proposed in June and agreed to by shareholders in early September – will put $10.75 per share in CML's shareholders pockets. It will also see the creation of a giant new entity that will have a commanding presence in the Ontario and British Columbia markets. But it will also leave a gap in the spectrum of health and biotech related investments available on the Canadian public markets.

There are only a few mid- to large-cap companies in the health sector in Canada, and fewer still that pay dividends.

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"There is not a lot of choice, if you are market-cap constrained," said Alan Ridgeway, an analyst at Paradigm Capital Inc. in Toronto. "And if you are income constrained, there is [even less]."

He noted that "CML was unique, in that it was in the services spaces, with stable revenue and margins, and able to pay dividends."

The only other medical company of a similar size on the TSX that pays a dividend is Medical Facilities Corp., a company that has a controlling interest in specialized surgical hospitals in several U.S. states. It has a market cap of about $450-million, and a yield of about 7 per cent.

For an investor willing to forgo dividends, but who wants some heft, there are a handful of large medical firms listed on the Canadian market, including the big kahuna, Valeant Pharmaceuticals International Inc. It is the Montreal-based multinational drug firm that was formed when U.S.-based Valeant merged with Biovail Corp. in 2010. It has a substantial market cap of $35-billion, but it hasn't paid a dividend since the Biovail merger.

Another large-cap player is Catamaran Corp., a TSX-listed company that helps U.S. clients manage their employees' benefits and prescriptions. Its market cap is over $10-billion, but it too pays no dividend.

Both Valeant and Catamaran are big enough to appear on the S&P/TSX 60 large-cap index.

Among the range of mid-cap stocks in the Canadian health-care universe are Montreal drug distributor Paladin Labs Inc. (market cap $1.2-billion), contract drug maker Patheon Inc. ($880-million), medical isotope maker Nordion ($550-million), and imaging company Novadaq ($800-million).

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Most of these are profitable companies and have fairly low risk, because they are above the $350-million threshold for mid-cap companies. But none pay dividends.

Another alternative to these core biotech and health stocks, suggests health-care consultant Wayne Schnarr, is to look at the publicly traded senior care companies that run medical and residential buildings for seniors across the country. This group includes large firms such as Extendicare Inc., Leisureworld Senior Care Corp., Chartwell Retirement Residences REIT, and Northwest Healthcare Properties REIT, along with smaller ones such as Amica Mature Lifestyles Inc. and HealthLease Properties REIT.

Although these companies are sometimes considered real estate plays – and include property risk as well as exposure to health care – they also pay substantial dividends with some having yields over 8 per cent.

The other alternative is for investors to look at the much broader range of small cap companies available in the medical and biotech sector. But investing in these kinds of companies is not for the faint of heart, as they tend to be volatile and subject to what analysts call "binary events" – extremely good news such as successful drug trials or regulatory approvals that drive up stock prices, or bad news such as failed data or regulatory rejection, which usually puts shares into a tailspin.

"There are lots of small caps, and there are some really interesting small caps, but it is such a different risk profile than CML," Mr. Ridgeway said. People who invested in CML because of its stability should not be looking at the small players as an alternative, he said.

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