Snip from WSJ:
Health-Care Manager Is Down
On Drug Stocks, Likes Biotech
Jordan Schreiber thinks most large, widely owned drug companies are ailing and getting sicker by the day.
The manager of the $626 million Merrill Lynch Healthcare fund says the combination of brand-name drugs coming off patent, a dearth of new products and costly overhead may prove lethal for profits at pharmaceutical firms such as Pfizer, Merck and Bristol-Myers Squibb. Long seen [and owned] as growth stocks, Mr. Schreiber says they're now sluggish fare whose modest growth and dividends make them best suited for bargain-hunting value investors. At the same time, he sees vast opportunities for biotech firms developing cancer and Alzheimer's treatments based on a patient's DNA.
Mr. Schreiber has plenty of experience to draw on, given his 20 years at the helm of this fund, which was a technology/biotechnology portfolio until 1992. During the past decade, Mr. Schreiber has averaged a 15% annual gain that tops the S&P 500 and 80% of the nation's health-care funds, according to Chicago investment researcher Morningstar Inc.
What does Mr. Schreiber make of the Medicare drug bills pending in Congress that would extend a prescription-drug benefit to seniors? Why is dot-com survivor WebMD his fund's top holding, and where did pharmaceutical companies go wrong? We got some answers.
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4. Now let's turn to biotechnology companies, many of which have seen their shares levitate during this year's tech rally. What about growth prospects and valuations there?
The new FDA commissioner [Mark B. McClellan] is responsible for probably half the valuation increase we've seen in biotechnology stocks. Now, if a company has a drug for severe illness like cancer, Alzheimer's or obesity in advanced clinical tests without significant side effects, it gets approved. That's a marked change from what we saw in recent years. It saves time and money for biotech companies. Many companies have cancer treatments in Phase II trials, so I'm quite positive about this area in coming years. I think we're going to see a wave of important new treatments based on a patient's genetic make-up.
Of course, valuation is tough to talk about here. You can't buy and hold any of these names unless you're talking about Amgen or Genentech, which we own in the fund. But Genentech has doubled in the past couple of months. [It trades at more than 65 times its expected earnings for the year.] After a dramatic run, prices for many of these companies are at unsupportable levels and we need a rest. I do think this is the place to be over the long term though.
In terms of the best companies, you'd have to give the nod to Genentech and Millennium Pharmaceuticals. Among platform technology companies, there's a smaller company we own called Lexicon Genetics, which is trying to address cancer but also determine gene function. They are making some big bets scientifically.
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