FYI: Copy & Paste 7/4/14: Amy Feldnan: Barron's:
I will ask some same question that I have several times in the past, do you own a health care fund ? If you don't you should.
Regards,
Ted
It has been 11 years since the human genome was first mapped, at a cost of $2.7 billion. Since then, the cost of DNA sequencing has dropped to about $1,000, and our understanding of the nature of disease has expanded exponentially. This has created a land rush for biotechnology companies, which use living organisms to develop medical treatments. For the past three years, biotech stocks have risen spectacularly, though this year things have been bumpier.
Eddie Yoon, manager of the $6.3 billion Fidelity Select Health Care Portfolio (ticker: FSPHX) and leader of Fidelity's 12-person health team, compares the innovations in biotech -- and the new companies being created -- to the explosion in technology and digital businesses that happened after Netscape's 1995 initial public offering. "The price point of sequencing the human genome has fallen so fast, and the early-stage pipeline for biotech is exploding right now," Yoon says. "That's what is driving innovation.
There are many ways to invest in that innovation, and the pros take very different views in terms of assessing value and risk. New drugs are altering the way we live, and areas like immuno-oncology hold enormous promise, but getting drugs to market is expensive, time-consuming, and far from a sure thing. With risks high, and valuations no longer cheap, minefields abound.
The best of the health-care funds (and funds with large stakes in health care) all have investments in biotech, but their strategies differ. At one end of the spectrum, Vanguard Health Care (VGHCX), the granddaddy of health funds with $37.7 billion in assets, takes a more conservative approach: It has just 12% in biotech -- a smidge less than the MSCI ACWI health-care index -- while its No. 1 holding is Merck (MRK), the global drug company with a strong pipeline. The fund rarely leads during market rallies, though it suffers less on the downside.
By contrast, the $2 billion Janus Global Life Sciences (JFNAX) has 32% in biotech, including three of its top five holdings: Gilead Sciences (GILD), a leader in HIV drugs, which has recently launched the hepatitis C blockbuster Sovaldi; Celgene (CELG), whose flagship product, Revlimid, fights blood cancers; and Biogen Idec (BIIB), which specializes in drugs for neurological disorders, autoimmune disorders, and hemophilia. Says Janus Global Life Sciences' manager Andy Acker: "We've seen an acceleration of innovation. More drugs are getting approved more rapidly at lower cost." In fact, he adds, since 1999, biotech-drug sales have soared from $5 billion to more than $100 billion, and the number of blockbuster biotech drugs has risen tenfold, from three to more than 30, a level of innovation that he expects will continue.
Matt Kamm, lead health analyst at Artisan and co-manager of the $1.1 billion Artisan Global Opportunities (ARTRX), which has 19% of its assets in health care, sees similar opportunities. He points to Regeneron Pharmaceuticals (REGN), whose drug Eylea treats macular degeneration, and which is the fund's No. 3 holding. As the lines blur between biotech and big pharma, Regeneron has set up a partnership with Sanofi (SAN.France), the Paris-based drug giant, also a holding. "It has allowed Regeneron to act like it has a giant balance sheet and build a pipeline, and it gives Sanofi growth and products for the future," Kamm says. In addition to Eylea, Regeneron (which trades at 26 times next year's earnings) has three drugs in Phase 2 and 3 trials, for cholesterol, rheumatoid arthritis, and atopic dermatitis, and another 11 in development. That diversified drug pipeline appeals to Kamm: "This is a risky business, even for the best companies, so it's important that companies make good, risk-adjusted decisions about research-and-development spending and have multiple shots on goal."
For similar reasons, Kamm likes Biogen Idec, which trades at 23 times next year's earnings. It has a new oral medication for multiple sclerosis, Tecfidera; a new product launching for hemophilia; and other treatments in the pipeline for MS, spinal muscular atrophy, and Alzheimer's -- all squarely part of the firm's focus on neurological disorders. "They're all high-risk as stand-alone opportunities," Kamm says. "But we think it's a broad enough pipeline."
WHAT OF THE WAVE of biotech IPOs earlier this year? Those are riskier. Janus' Acker, who invests in small-company biotech, keeps the holdings to small pieces of the portfolio. "Some of these are pretty early stage," he says. "We saw some frothiness in the market." Artisan's Kamm is steering clear completely. "They're coin tosses or lottery tickets," he says.
The Best Defense Is a Good Offense
With health-care funds returning 37% in the past year, the sector's no longer a defensive strategy. Below are five good options.
Assets Total Return*
Fund/Ticker Manager (bil) 1-Year 5-Year Top 3 Holdings**
Fidelity Select Health Care Portfolio/FSPHX Eddie Yoon $6.3 50.3% 27.6% Actavis, Biogen Idec, McKesson
Janus Global Life Sciences/JFNAX Andy Acker 2.0 45.0 25.7 Gilead Sciences, Aetna, Celgene
Prudential Jennison Health Sciences/PHLAX David Chan 2.5 36.6 28.4 Alexion, Biomarin, Vertex
T. Rowe Price Health Sciences/PRHSX Taymour Tamaddon 9.1 39.8 29.1 Aetna, Agilent Tech, Alexion
Vanguard Health Care/VGHCX Jean Hynes 37.7 37.9 22.4 Merck, UnitedHealth, Forest Labs
*Returns are annualized as of 07/02
**As of 05/31 Sources: Morningstar; fund companies
Fidelity's Yoon trimmed his fund's exposure to small biotech stocks early this year when he saw stretched valuations and decreasing quality. His fund now tilts its biotech holdings toward larger companies with stable free cash flows and encouraging pipelines. Plus, he has been diversifying holdings to areas such as medical devices, specialty pharmaceuticals, and life sciences. Where Gilead was once Fidelity Select Health Care's top holding, for instance, now it's Actavis (ACT), a global drug company with a huge business in generics. It may not be a sexy business, but Yoon argues that its global footprint in more than 100 countries, and its ability to leverage its sales force across multiple categories, gives it advantages. The shares, recently at $222, trade at 13 times next year's earnings estimates. "They are an innovator; they are a consolidator; and they are accessing the global market," Yoon says.
Regardless of the broader economy, Yoon argues, the rising demands of an aging population and an emerging middle class worldwide will continue to drive health care. "Just because the health-care space is up a lot," he says, "doesn't mean there aren't a lot of good opportunities in this business."
Comments
Mike_E