Saturday, August 12, 2000

The Sophisticated Investor

Wait a bit before jumping on health-care wagon

By John Waggoner
USA Today

        So your body is falling apart like a '71 Impala. Gosh, you wonder, is there some way I can profit from that? Sure. You could invest in a health-care fund. They not only have strong demographic trends behind them, but they have an impressive seasonal pop as well.

        But wait until summer is over before you invest.

        Health-care funds have one big factor in their favor: The 78 million members of the baby-boom generation. The generation born from 1946 to 1964 has powered almost every major invest ment trend for the past two decades.

        The oldest boomers are now 54 — old enough to go straight from a little one-on-one basketball to the emergency room. Even the youngest boomers, now 36, are old enough to be gobbling hair-loss pills and giggling nervously about their upcoming physicals. And as the boomers get older, they will need even more health care.

        None of this has been lost on Wall Street. Health-care funds have been booming. The average health-care fund has soared 40 percent this year, versus a 2.8 percent gain for the average stock mutual fund.

        It hasn't been a smooth ride. Health-care funds peaked in early March and didn't regain their lost ground until June. The most recent rally was sparked by the success of the human genome project — the process of decoding the building blocks of DNA. By understanding how genes work, scientists hope to create new treatments for disease.

        Most of the rally was in biotechnology stocks, which stand to benefit the most from the unraveling of the human genome.

        “Biotech stocks were up 45 percent or more,” said Tim Bepler, manager of Orbitex Health and Biotechnology fund.

        In the past few weeks, however, the entire sector has suffered a relapse. Part of that is just Wall Street's usual reaction to a big rally. Stocks often give back about half their gains after an outsized run-up. But there are other factors, too:

        • Politics. Many of the large pharmaceutical companies are languishing, in part because investors fear that high drug prices will become a presidential campaign issue, particularly if the race tilts toward Democrat Al Gore. “They are easy companies to pick on,” said Faraz Naqvi, manager of Dresdner RCN Global Healthcare. “They're rich; they sell expensive drugs to sick people.”

        Political fears could be hurting biotech stocks, too. It's expensive to develop new drugs and nurse them through the Food and Drug Administration's approval process. Price controls could make some new drugs unprofitable. “They're scared of any prospect of price controls,” said Carl Gordon, co-manager of the Eaton Vance Worldwide Health Care fund.

        • Seasonality. Health-care stocks fare well in the fall and winter, and often languish in the summer. In part that's because many of the big scientific meetings, where promising new treatments are announced, are held in winter. “Those are the months to own biotech,” Orbitex's Mr. Bepler said. And because many biotech companies are small, they benefit from the traditional end-of-the-year rally in small company stocks, too.

        So should you buy health-care stocks? The answer is yes — but there's no hurry.

        “We're wary,” Mr. Naqvi said. “We're in full defensive mode.” He has been keeping much of the fund's assets in established biotech companies, like Amgen, because they have a bona fide prod uct line and earnings.

        Michael Dauchot, Dresdner's co-manager, thinks stocks of companies that make medical devices are a safe play, too. “No one is talking about price controls on defibrillators,” he said. He also likes suppliers to biotech companies, such as PE Biosystems Group.

        What about the big pharmaceutical companies?

        Investors are still worried that the pipeline of new drugs is weak, and that generic versions of blockbuster drugs could weaken earnings. Shares of Eli Lilly, for example, plunged nearly $32 a share Wednesday after a court ruling that could speed up the sale of a generic version of Prozac, its best-selling antidepressant drug. Lilly's tumble dragged down other big pharmaceutical companies, too. “The big pharmaceuticals are dead money going into the election season,” Mr. Naqvi said.

        So for most reasonably aggressive investors, health-care funds are a good long-term treatment for lackluster returns. But if you're looking for an optimal dosage, don't buy them just yet. Wait until the weather gets cooler — and the elections are over.


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