S&P Rank: 4 Stars
Aug. 14, 2003
On the Cusp of a New Drug Boom
Quick Take: Drug and biotech stocks suffered in 2002, hurt by poor earnings, a dearth of new products, and an alarming number of patent expiries, which allowed smaller generic companies to make the same drug at a fraction of the price. But the health care sector, particularly the biotech sector, has rebounded strongly in 2003, largely on the back of a flurry of new drug approvals and greater optimism about the industry as a whole.
After shedding 23.4% in calendar 2002, the $150-million Evergreen Health Care Fund (EHABX) soared 32.2% year to date through July 31. For the three years ended in July, the fund gained an average annualized 7.4%, versus 5.0% for the average health care fund. Portfolio manager Liu-Er Chen has been at the helm since the fund’s inception in December, 1999. Though Evergreen Health Care has assumed slightly more risk than the average health care fund, it has also gained the edge. The portfolio is ranked 4 Stars by Standard & Poor’s.
The Full Interview:
S&P: Could you describe your investment process?
CHEN: We invest in health care companies around the world — without regard to market-cap size — that are trading at a significant discounts to their intrinsic value and have the potential to deliver above-average long-term returns. We focus on business fundamentals, valuation and earnings growth. We are not momentum investors.
S&P: What are the portfolio’s characteristics?
The fund currently has a median market cap of about $1.68-billion, which might imply a mid- or large-cap bias, but it actually reflects our heavier weightings in the bigger companies. We have about 125 stocks in the fund, but the top 80 names represent 90% of total assets.
S&P: What are your top holdings?
CHEN: As of June 30: Pfizer Inc. (PFE), 6.0%; Genentech Inc. (DNA), 4.4%; Johnson & Johnson (JNJ), 4.3%; Amgen Inc. (AMGN), 3.8%; Merck & Co. (MRK), 3.0%; CIGNA Corp. (CI), 2.3%; Bristol-Myers Squibb (BMY), 2.1%; Schering-Plough (SGP), 2.1%; Abbott Laboratories (ABT), 2.0%; and Lilly (Eli) (LLY), 1.9%.
S&P: What is your industry allocation?
CHEN: As of June 30: pharmaceuticals, 48.1%; biotechnology, 24.8%; health care providers & services, 17.3%; and health care equipment & supplies, 8.3%.
S&P: Can you illustrate your investment style through a particular stock?
CHEN: In early 2002, I bought shares of Biosite Inc. (BSTE), a provider of medical diagnostics, when its stock crashed to the low teens as a result of a patent infringement lawsuit filed against the company by XOMA Ltd. (XOMA). However, on a fundamental basis, Biosite was in the midst of enjoying accelerated revenue growth, with significant amounts of cash on the balance sheet, and margin expansion, so the company’s stock was significantly undervalued. Based on our analysis and due diligence, we concluded the stock was worth $25 a share. After three months, the stock rose to the mid-$20′s and I sold it off.
S&P: What is the fund’s turnover rate?
CHEN: It was 198% for the year ended June 30, however, that doesn’t accurately reflect my buy-and-trade decisions. This is a relatively small fund and investors move cash in and out of it frequently. We maintain a full investment policy.
S&P: AstraZeneca (AZN) just received FDA approval for its new cholesterol-lowering drug, Crestor. Will this pose a competitive threat for Pfizer’s own cholesterol drug, Lipitor?
CHEN: I think Crestor will definitely be a blockbuster drug, but it will not really hurt sales of Lipitor, which is the world’s top-selling prescription drug and generated $7.9 billion in sales last year. I believe the market for the whole class of cholesterol drugs will increase globally, even though Lipitor might give up some market share. I expect Crestor to eventually become a $3-billion-plus drug.