Barrons:Alan Abelsons article-11-30-02
online.wsj.com
Biotech, of course, is part of that vast, amorphous and heavily populated sector known as "health care." One of the select few people whom we know capable of navigating it with ease, familiarity and insight is Larry Feinberg. Larry runs a hedge fund called Oracle Partners, based in Greenwhich, Conn., and his picks and pans have from time to time enlivened these gray columns, in the process, more often than not, fattening the purse of anyone who followed them.
Biotechs began a long descent back in 2000 that has trimmed a tidy 75% from their market value, including 49% this year alone (like everything else in the world except common sense, they were absurdly valued at their highs). Larry, who is both unusually perceptive and informed about the sector, deftly escaped serious fall-out from its collapse -- until this year. As he unblinkingly if ruefully admits, so many of the biotechs came crashing down to levels he couldn't resist -- only to keep sinking after he bought them.
The melancholy result: Oracle's incredible 13-year streak in which his investors netted after fees an extraordinary 30% annually was snapped big time. Although the final tally isn't in on 2002, the fund seems headed for a true bummer of a year, down somewhere in the upper 20% range. Unhappy but undaunted, Larry has regrouped, leached the portfolio of the losers, installed some risk-limiting disciplines and geared up for a return to his winning ways.
All of which is a long, but we think worthwhile, prelude to a couple of the stocks he likes and one that he doesn't. In health care overall he sees a sea change, driven by tidal trends. Prominent among the latter is the conflict between the inexorable rise in demand and the sudden sharp spike in prices made by the likes of HMOs and kindred insurers. Something will have to give, and he thinks it'll be rising prices.
Larry sees what he dubs "healthcare consumerism" as the wave of the future in health care, inspired by the growing shift to defined contributions from defined benefits, in which the cost is shouldered in part by the employees rather than, as traditionally, by the corporation. And he's placing his bets on health-care companies that favor the "consumer" -- in this case, individual as well as corporate.
Two of the stocks he's keen on are WebMD and Millennium Pharmaceuticals. The stock he's short is Express Scripts. We'll talk briefly about each; why don't we start with the negative so we can end on a happy note?
Actually, Larry isn't high on any of the pharmacy-benefit managers, a group that includes AdvancePCS, Merck's Medco, which it recently was poised to take public but hasn't, and Caremark Rx as well as Express Scripts. He thinks they are just where you don't want to be in the changing health-care scene he foresees, which prominently features a more searching and knowledgeable consumer.
The pharmaceutical-benefit managers, he relates, evolved from an industry that was paid a fee for negotiating prices into a business that heavily depends for profits on rebates from drug companies for switching patients to their particular drugs. Larry detects growing aversity to the business on the part of big insurers, regulators, nosy government types and interested parties in general. Express Scripts, with a P/E of over 20 times next year's estimated earnings, appears quite vulnerable to disappointment or a souring of investor sentiment on the group as a whole.
WebMD started up in 1996 as Healtheon Corp., but attained its present incarnation via a series of mergers and acqusitions. Using, as its name strongly implies, the Internet, along with other electronic systems, the company provides a wide diversity of transaction and information services for patients, doctors, pharmacies, hospitals, payers and you-name-it health-care participants. It also runs a site for consumers and doctors, chock full of medical info and news.
The company is winding up its first year in the black and Larry reports all three divisions are now profitable. He predicts earnings of 40-50 cents a share next year, 75-80 cents the following year and nothing but gains as far as the human eye can see. The stock closed at around 8½ in Friday's truncated session. He's confident of $20 within 18 months or so. Most important, he insists, WebMD is in the right parts of health care at the right time.
Finally, Millennium Pharmaceuticals, a biotech outfit that began life on the frontier of research into genomics-based drugs, has become an integrated biopharmaceutical company, with a stress on commercializing the growing number of products it has under development. Larry notes that Millennium has made great strides in strengthening its management and reducing its burn rate. He's not unimpressed, either, by its very comfortable finances, topped by some $1.8 billion in cash.
Millennium, moreover, has what Larry describes as "a major new cancer drug" called Velcade, for multiple myeloma. The response rate reportedly in the testing has been extremely good, and Velcade holds out promise of ultimately treating a wide variety of cancers. What's more, according to Larry, Millennium's pipeline is rich in other intriguing drugs. The stock, whose yearly range is roughly 7-36, closed last week around 10. It won't surprise you to learn Larry thinks it has nowhere to go but up. And up.
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