Health-Care Managers Point to Opportunities

Health-care stocks haven't been tearing up the charts so far in 2001. But that doesn't deter the two leading health-care fund managers who spoke at Morningstar's 2001 Investment Conference in Chicago on Tuesday afternoon. 

Sam Isaly, lead manager of Eaton Vance Worldwide Health Sciences Fund  (ETHSX), holds a rosy outlook for the sector, pointing out that it's one of the few areas of the market that can consistently generate 20% annual earnings growth. He runs a concentrated, low-turnover portfolio focusing on pharmaceutical and biotech stocks, such as Pfizer  (PFE) and Gilead Sciences  (GILD). 

Faraz Naqvi, a physician by training who comanages  Dresdner RCM Biotechnology Fund  and Dresdner RCM Global Health Care Fund , waxed enthusiastic about biotech stocks, calling biotech a "transformational technology" of the future. In contrast to the hype surrounding Internet stocks a couple of years ago, he said, biotech companies can reap rewards from creating genuine products and focusing on well-defined markets for ailments such asthma, heart disease, and cancer. 

Both Naqvi and Isaly voiced concern about political pressures on the industry. With Democrats taking control of the Senate, it looks more likely that a bill will be passed to add prescription drug coverage to the Medicare program. That means that the federal government would become a dominant buyer of prescription drugs and could force drug companies to lower their prices. But while Isaly thinks investors should watch for further developments on the issue, he said that current stock prices have already adjusted down to reflect the impact. 

Naqvi, meanwhile, noted that the pharmaceutical industry is hugely profitable. Whereas a product like Palm's   Palm pilot has gross margins of about 25%, Pfizer's blockbuster cholesterol drug Lipitor has gross margins of 95%. That means that the industry can still do well even if it has to charge lower prices on leading products. 

In response to audience questions about how to profit from new scientific advances in mapping the human genome, Isaly said that he thinks the impact of genomics will be dramatic, but the full payoff won't come for at least another five years. Right now, there are 500 genes that have been mapped as targets for specific drugs, but eventually there will be 5,000 "druggable" targets. Naqvi noted that big pharmaceutical companies like Pfizer have been investing aggressively in genomics and are well positioned to benefit from new discoveries in the area. 

The money managers mentioned a couple of favorite stocks. Naqvi said that his top pick for investors with at least a three-year time horizon is Genentech  , which he thinks can surpass Amgen  (AMGN) as the premier biotech company thanks to its rich pipeline of new drugs for cancer, asthma, and other ailments. His fund has also owned Johnson & Johnson  (JNJ) as a major holding, largely because of its medical devices unit. The company is coming out with a new drug-coated cardiac stent that he thinks has better sales potential than competing products. Isaly, meanwhile, pointed to Swiss drug giant Novartis  (NVS), which is starting to show accelerating growth. He also likes Caliper Technologies , which specializes in microfluidics and high-throughput screening for the pharmaceutical industry. 

On the negative side, both managers had harsh words for Schering-Plough  , which is a current holding in both Eaton Vance Worldwide Health Sciences and Dresdner RCM Global Health Care. The company has been suffering after it announced serious manufacturing problems and a delay in approval on its next-generation version of Claritin. "The board of directors should get out their hatchets and carve these guys away," said Isaly. "Someone has fallen asleep at the switch and endangered their independence." 

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