Drugs, some biotechs look like winners in 1999
By Stephanie O'Brien, CBS MarketWatch
Last Update: 5:08 PM ET Dec 4, 1998
NewsWatch
NEW YORK (CBS.MW) -- Demographics, income growth, scientific
advances -- the trend line for drug stocks leads in one direction: up.
The Putnam Health Sciences Trust (PHSTX) illustrates that point.
The fund is No. 3, ranked by five-year return, on
the list of the top 25 health/biotech funds compiled
by Lipper Analytical Services. The annual rate of
return over those five years has been 25.3 percent.
Based in Boston, it's managed by Richard England,
David Carlson and Margery Parker. The fund's
assets, which include small-, mid- and
large-capitalization health-care-related stocks, are
valued at $4.5 billion. Holdings are weighted
heavily toward large-cap pharmaceuticals.
Big year for 'big pharma'
So it's probably no surprise to find that the fund is
so high on the list, since pharmaceuticals have
performed so well recently. The managers expect
the scenario to last well into 1999 where big
holdings in "big pharma" can mean a fund that's
bulletproof should U.S prosperity wane.
"The driver of the health-care sector is the strength of U.S.
pharmaceuticals," Parker says. Momentum is being spurred by newly
available drugs and others that will likely receive Food and Drug
Administration approval for sale in the coming quarters, she says.
As 1999 unfolds, the fund managers see the U.S. economy weakening.
That doesn't worry them, though, because they see pharmaceuticals
companies' earnings growth well in excess of that in the broader market.
"We believe that these stocks will outperform the Standard & Poor's 500
Index. The fundamentals are strong. Their pipelines are full of new,
exciting drugs," Carlson says.
Hot holdings
Among the fund's star performers are Warner Lambert (WLA), which has
been driven by the success of Lipitor, a cholesterol drug. Rezulin, the
company's diabetes drug, is gaining market share, and the markets it is in
are growing, Carlson says.
Solid fundamentals for large-cap drug stocks are expected to continue in
1999, Parker says. Even as the economy slows down and corporate
profits decline, she says, these stocks will continue to outperform.
The Putnam fund also owns shares in a handful of biotechnology stocks,
which have rebounded from very depressed levels in September, Carlson
says. Amgen (AMGN), Biogen (BGEN), Centocor (CNTO) and
Immunex (IMNX) "have had a nice run," he says.
Good news' impact
"There's been a flow of good news over the past few months. Sentiment is
fairly positive right now," Carlson says. Many companies actually have
biotech products on the market, which hasn't been the case historically, he
says.
"Pipelines [are] continuing to grow, which is driving a lot of favorable
activity at the FDA," Carlson says. But it's important to remember, he
notes, that, in the past, and for the industry as a whole, failures have far
outweighed successes.
The Putnam fund stays away from most health-care-services stocks, such
as HMOs, as many issues cloud the profit outlook for the sector.
The fund does own shares in Quintiles Transnational (QTRN), a provider
of testing and marketing services to help major pharmaceutical companies
bring their drugs to market. The fund also owns shares in Cardinal Health,
(CAH) a drug distributor.
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