Just how healthy are drug stocks? Fund manager shifts toward midcap
health stocks
[Curtis, MTC mentioned]
By Stephanie O'Brien, CBS MarketWatch
Last Update: 9:03 PM ET Nov 17, 1998
NewsWatch
PRINCETON, N.J. (CBS.MW) -- Have the sterling qualities of some
pharmaceutical stocks finally become too precious?
Jordan Schreiber, who manages the Merrill Lynch Healthcare Fund
(MAHCX), with about $450 million in assets, thinks they might be.
For the year to date, Schreiber's fund is up 17.8 percent. That places it
among the best-performing funds in its peer group for 1998, as well as
over other periods, according to Lipper Analytical services.
The fund's assets are weighted toward pharmaceutical stocks, but it also
contains biotech stocks and shares in other health-care companies.
"We follow everything globally -- all niches, all corners -- from large caps
to biotechs. Strategically, we look for superior growth, based on products
in the pipeline," Schreiber says.
"The fundamental outlook for the [pharmaceuticals] group is excellent.
The companies should continue to have double-digit earnings growth and
no products are coming off-patent," Schreiber says.
So why has he been reducing his positions in them?
"They're expensive," he says.
Too much of a good thing?
During the past six months, Schreiber's been reducing stakes in blue-chip,
large-capitalization pharmaceutical companies and adding to his holdings
in midcap health-care companies.
"The fundamentals are so favorable that share prices have moved up to
the point that they're vulnerable," Schreiber says. In a general market
pullback, the stocks are vulnerable to a big downside swing, he says.
While pharmaceutical stocks have had an enviable performance, up 40
percent this year alone, Schreiber says, they are about the only group that
hasn't seen a pullback, as big market declines dragged down high flyers in
almost every other industry earlier this year.
So Schreiber thinks the time is right to make some defensive moves.
Switching caps
"We've gradually been shifting to midcaps over the last several months to
reduce market risk," he says. He's added to positions in Alza Corp.
(AZA), Bausch & Lomb (BOL), distributors Cardinal Health (CAH),
McKesson Corp. (MCK) and AmeriSource Healthcorp (AAS).
Another favorite is Sepracor (SEPR), which develops and improves
existing pharmaceuticals. For example, "they eliminated the side effects of
Seldane," a decongestant, developing Allegra as an alternative, Schreiber
says. The company gets a royalty on sales. Sepracor is also working on
the antihistamine Claritin that should extend its patent life, he adds.
Schreiber also likes biotech company Genentech (GNE).
Still, you won't find him "out of the big ones."
Schreiber says he's keeping an eye on new anti-arthritic drugs from
Monsanto (MTC) and Merck (MRK). The drugs aren't more effective,
but they reduce side effects associated with treating arthritis, such as
internal bleeding. The fund owns shares in both companies.
"I'm keenly interested in monitoring the progress there," Schreiber says.
"It's a horse race."
At the moment, he's betting on Monsanto, which has the lead. Merck still
has to get Food and Drug Administration approval to bring its product to
market.
Flight from quality
Still, while many see the large-cap drug stocks as a safe-haven investment
in a downturn, Schreiber says he'll continue to bulk up on midcaps as the
blue chips get more expensive.
Though the stocks weathered severe market volatility earlier this year, he
thinks they may not always be immune.
"I'm still nervous," he says. "I'm always nervous."
Stephanie O'Brien is a reporter for CBS MarketWatch.
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