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By Dan Culloton | 03-04-2011 10:32 AM

Biotech and Pharma Still Look Cheap

Dodge & Cox's Diana Strandberg and Charles Pohl discuss why the pharma industry looks like one of the most compelling places to invest today.

Dan Culloton: I'm Dan Culloton, Associate Director of Fund Analysis at Morningstar. I am here today with Diana Strandberg and Charles Pohl of Dodge & Cox Stock, Dodge & Cox International and Dodge & Cox Global. Thank you for visiting today.

Charles Pohl: Thanks for having us.

Diana Strandberg: Thanks for having us.

Culloton: Well, having the luxury of being able to invest across the globe in all of your funds, I thought I'd begin by asking you just, where are you finding better opportunities today across the equity landscape: internationally or domestically?

Strandberg: Well, I'd have to say that, we think about the opportunities on a bottom-up basis and where we are seeing a lot of attractive investment opportunities is in pharma and that would be both in Europe and the U.S. It's a global industry, where we think that the valuations as very attractive. Strong balance sheets. And where we see that investors are more pessimistic about their revenue growth prospectus because of questions about drug pipelines and the regulatory landscape. And where we see, from today's starting valuations, opportunities for revenue growth both in terms of drugs under development, emerging market opportunities and cost cutting and share repurchase opportunities to drive earnings and we think therefore stock prices.

Culloton: This is an area that hasn't worked for a number of years. Does that concern you at all that the fact that the turnaround in pharma and the resulting reward that would come from valuation improvement hasn't happened yet?

Pohl: Well, one of the things that has occurred, obviously, is that the stocks have underperformed and so the a valuation gap that is fairly substantial, has opened up between pharma and the rest of the market. With the pharma stocks selling in the 10 to 12 P/E multiple range, actually a few of them even cheaper, the major companies, and the market in the 14, 15 kind of range, depending on what earnings numbers you are using. So their underperformance has created a bigger valuation gap and we think that valuation gap does in fact make them more attractive than they were previously.

Strandberg: And you know, as we move very incrementally, but we are also persistent where we have investment conviction and our investment convictions rest on the fact that we are doing our own research. And so to the extent that they haven't worked in 2010, as Charles mentioned, the valuation opportunities have become more attractive. We have nibbled a little bit more. We hope we won't have to be persistent and patient, but we are willing to be and that's a hallmark of how we approach investing at the firm.

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