TIP SHEET: Invesco Manager Turns More Positive On Big Pharma
07/12/2012| 03:15pm US/Eastern
--Invesco Global Health Care fund gets more positive on Big Pharma stocks
--Manager Taner says drug makers have become more shareholder friendly
--Profit growth seen as companies get past patent expirations
By Peter Loftus
For much of the past decade, Derek Taner wasn't a big fan of large pharmaceutical companies.
Patent expirations were eroding sales of big-selling drugs, and the relatively low productivity from the industry's research-and-development efforts turned off Mr. Taner and many other investors. Big Pharma stocks generally had "abysmal performance" the past 10 years, Mr. Taner said.
But now his thinking is changing. Mr. Taner, who manages the $1 billion Invesco Global Health Care fund (GGHCX), says the Big Pharma sector is becoming more attractive, and he is buying up shares.
Before last year, the Invesco fund didn't own Pfizer Inc. (>> Pfizer Inc.), maker of the blockbuster Prevnar 13 vaccine and the world's biggest drug company by sales. But now Pfizer is Mr. Taner's top position, at 4.26% of the portfolio, according to Morningstar.com. He also owns Roche Holding AG (RHHBY, ROG.VX), Abbott Laboratories (>> Abbott Laboratories) and Sanofi (>> Sanofi SA).
He's still underweight Big Pharma relative to benchmark indexes, but less so than before. The fund also owns shares of biotechnology companies, medical-device makers and health insurers.
What changed? For one thing, "the stocks are incredibly cheap," says Mr. Taner. Indeed, Pfizer trades at about 10 times projected 2012 earnings, even after the share price rose 12% in the past year.
Mr. Taner said some large drug makers are poised for durable earnings growth as they get past patent expirations. Blockbuster drugs including Pfizer's Lipitor cholesterol-lowering pills and Eli Lilly & Co.'s (>> Eli Lilly & Co.) antipsychotic Zyprexa lost patent protection late last year, and Merck & Co.'s (>> Merck & Co., Inc.) Singulair asthma drug is set to lose patent protection in August.
Drug R&D engines are becoming more productive at some companies, he said, and many companies have substantially reduced operating expenses.
What's more, investors now perceive some companies to be more "shareholder friendly." Bristol-Myers Squibb Co. (>> Bristol Myers Squibb Co.) moved away from drugs mainly prescribed by primary-care physicians--a market most vulnerable to pricing and other pressures--to focus on more-lucrative specialty drugs, such as those treating cancer.
Pfizer has embarked on a plan to shed certain nonpharmaceutical assets, using the proceeds to repurchase shares. Abbott Labs is in the process of separating its core pharmaceutical unit into a new company.
Mr. Taner sees improved dividend yields, better balance sheets and sustained earnings growth for many Big Pharma stocks.
In other health sectors, the Invesco fund has been overweight on hospital and managed-care stocks. That hasn't changed in the wake of the landmark decision by the U.S. Supreme Court to uphold the bulk of the 2010 health-care-overhaul legislation, Mr. Taner says.
Among other picks, he also likes drug maker Endo Health Solutions Inc. (>> Endo Health Solutions Inc) and insurer Health Net Inc. (>> Health Net, Inc.).
Todd Rosenbluth, a mutual fund analyst with S&P Capital IQ, says the Invesco Global Health Care fund's performance has been slightly below average compared with other global health-care funds. But he says S&P analysts like prospects for many of the Invesco fund's current holdings, including drug stocks such as Pfizer. He also said the Invesco fund has been less volatile than some other health-care funds.
The Invesco fund had year-to-date returns of 12.69% as of June 30, according to Morningstar, ahead of the benchmark MSCI World index gain of 5.91% but below Morningstar's health-fund category average return of 15.51%.
Standard & Poor's rates the fund three out of five stars, giving it neutral ratings on performance, risk considerations and cost factors.
(Peter Loftus covers the pharmaceutical industry for Dow Jones Newswires. He can be reached at email@example.com)
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