10 Questions With Dresdner RCM Global Health Care Fund Skipper Faraz Naqvi (Cont'd)
This is Part II of
TSC's
10 Questions interview with Dresdner RCM's Faraz Naqvi. Please be sure to read Part I.
TSC: 6. Let's play word association. I'll just mention a few bellwethers, and you can let me know if you own shares and your take on the company. Let's start off with Pfizer.
Naqvi:
I think they're the premier pharmaceutical company. They've got not only a great product portfolio, but they have a terrific pipeline, near term and distant. They're the marketing pharmaceutical of choice. They can out-market anybody. We went through and talked with all the pharmaceutical companies -- we're revising our models -- and the only one who gave us upward-revision indications was Pfizer. Everybody else was tempering their three-year growth rates a little bit. Pfizer was not.
TSC: That's your top holding. How about Merck?
Naqvi:
They have terrific early-stage R&D. They don't have great late-stage R&D. They have a very good marketing force. They're also a very arrogant company. They really believe that, whatever's going internally, they can do better than anybody else. That's a very arrogant position when you're in this industry. They've never really gone toward the merger scenario before. I think they're going to have to. The first step I see is a merger with Schering-Plough.
The biggest near-term concern for Merck is, the FDA right now is deciding on labeling for Vioxx, one of their drugs. If the FDA decides to put a cardiovascular warning on Vioxx, that could be a seminal event that really turns this stock down. If they don't do it, it's not going to really help them that much. But if they actually put that labeling on Merck's product, that could be really, really negative.
We own Merck in the Global Health Care fund, but it's not that big of a holding. It's huge in the index, so we almost have to have some exposure to it at all times. But it's a 2.8% holding, which is pretty significantly underweight to our benchmark. It's 10th on our list of holdings.
TSC: Johnson & Johnson (JNJ) - Get Report?
Naqvi:
J&J is our second-biggest holding in the health care fund. J&J is interesting, because the Street right now is focusing on new competition against two big products. One of those is Procrit, which is an anemia product that's going to get competed against by Amgen. The second product is Risperdal, a schizophrenia product that's going to get competed against by Pfizer. In a way, I think that's invalid because we've been able to see growth in a lot of other areas. If you look at a couple other drugs that they have, like Reminyl for Altzheimer's disease, Remicade for rheumatoid arthritis, a hyperactivity drug called Concerta they got from their recent acquisition of
Alza
, growth in all these products could more than make up for competition in those other two products.
In addition, they have a couple of pretty exciting pipeline products. They have a cancer drug called Zarnestra, which is pretty interesting. They also have a neurologic drug called Topamax that's trying to get an indication for obesity, and could big. But the biggest story behind J&J is probably the drug-coated stents that they're coming out with. Stents are like springs that you can put in blood vessels to hold them open. The problem is they usually reclose. They usually get scarred over with inflammatory tissue and start blocking up again. J&J coated them with drugs that prevent that reclosure, and it's my belief that they have a very good chance at capturing -- right now they're at about 30% market share -- I wouldn't be surprised to seem them go, in a year or two, to about 80% market share.
TSC: Bristol-Myers Squibb?
Naqvi:
Bristol is a company that's in trouble. They acquired
DuPont's
pharmaceutical division a couple weeks ago. In our mind, that was a sign of weakness, if anything. It was just sort of a desperation move. They basically acquired a bunch of AIDS drugs, which aren't growing that well -- that whole market isn't growing that well. They also acquired some decent pipeline stuff, but it's a little bit speculative, a little bit risky. DuPont had no sales force whatsoever, so that was basically it. They just acquired some products. And they paid a high price for it -- over $7 billion. My feeling is that they basically sold off their
Clairol
business and bought DuPont just to get any pharmaceutical company in.
Bristol-Myers is facing a lot of patent issues. One drug is already off patent: Taxol, which was a great-selling cancer drug. There's another drug called Glucophage, which is coming up for patent expiration, that could have another negative effect. The only saving grace to Bristol-Myers is a hypertension drug called Vanlev that's supposed to treat the harder-to-treat patients, which would be older patients or African-American patients. Everybody's expecting that to be a huge drug. If there's anything wrong with that at all, if that falls apart at the FDA or their clinical trials, that's a big negative event for Bristol-Myers.
Bristol is a company that's in trouble right now, and it's pretty risky to bank it all on the approval of just one drug. We don't own one share of Bristol.
TSC: 7. People will ask the question, why would I buy a biotechnology fund when I could go with a broader health-sector fund, where the managers, if they see fit, can go heavily into biotech or, if they see opportunities elsewhere, they can go elsewhere. What's your take on that situation?
Naqvi:
I think that's a valid argument. But some people want just biotech. Usually with a biotech fund, it's going to be more risky, but you're probably going to get more return.
TSC: It's more of a home-run swing.
Naqvi:
Exactly. So some people asset-allocate and say, "I want biotech. I'm excited about biotech." Some people are going to just go for the home-run swing, the more risky, more volatile portfolio of products.
TSC: Of course, the other side of it is that when biotech hits its inevitable valleys, those funds get pneumonia as well, whereas a broader fund would not get hit as hard.
Naqvi:
Absolutely. You have to take the good with the bad. The fact that we manage both puts us in a good position. In biotech, we only invest in biotech companies, when the market is getting just clobbered in biotech. At that point we'll try to invest in some of the less risky names. We'll increase cash to an extent, but we won't just cash out. We keep true to our mission that this is a biotech fund. In the Global Health care fund, we switch from sector to sector as we see fit in terms of getting good returns.
TSC: 8. If you had to pick three companies to buy and hold for five years, what trio would you choose?
Naqvi:
Pfizer -- they're going to be what Merck was to the 1980s, the premier drug company. In terms of biotech companies, definitely Genentech. Genentech is going to really emerge as the premier
company in that area. And I'd buy
Millenium Pharmaceutical
(MLNM)
. Millenium is a genomics company. But they're one that is developing a lot of products that no one has ever heard of yet for pharmaceutical companies. Once that comes out, I think people will say, "Wow, we had no idea how deep their development process was."
TSC: 9. What is a wild card -- something not priced in that you're hearing when you're talking to people in the industry -- that could boost the sector?
Naqvi:
Something that could boost it is a lot of the developments we're seeing in the area of cancer. Those kinds of discoveries are really going to be a huge boost for the sector, especially for companies involved in extensive cancer research. The second half of the year we have a couple of cancer meetings. I wouldn't be surprised if we got a lot of publicity and enthusiasm around the cancer companies. I don't think people realize how close we are actually getting to treating a lot of forms of cancer.
TSC: What companies are we talking about?
Naqvi:
Novartis. Genentech,
OSI Pharmaceuticals
(OSIP)
. A small company called
Immunomedics
(IMMU) - Get Report
. Even Amgen is starting to make progress in cancer therapies. There's a company called
Human Genome Sciences
(HGSI)
that's really making some inroads in cancer treatment. And then a couple of the antibody companies -- one called
Abgenix
(ABGX)
and another called
Protein Design Labs
(PDLI) - Get Report
. And then in the big-cap pharmaceuticals, Bristol-Myers actually has a pretty good portfolio.
AstraZeneca
(AZN) - Get Report
has a great portfolio.
TSC: 10. How about on the downside?
Naqvi:
The biggest threat to health care is always government intervention. There's probably going to be a lot of backlash against drug pricing. Even if we get the Medicare drug benefit, I think you're going to see continued backlash, people saying they're paying more and more for drugs, that these things are costing $600-$700 a week. The other thing you'll see is the backlash against HMOs against drug pricing, starting to emphasize the use of generics over some of the branded drugs.
TSC: In the generic space, I know that Mylan Labs (MYL) - Get Report has had some negative news. What are some companies in the generic drug space that might actually benefit from the problems of the bigger-name companies?
Naqvi:
There's a couple. There's one called
Andrx
(ADRX)
. Anyone who's in the generic space and has some exclusivity on some big drugs, they're going to benefit, and Andrx is one of the premier names there. They have the corner on Prilocec, which used to be the biggest-selling drug before Lipitor overtook it. It's for gastro-intestinal reflux disease. Another company is
Teva Pharmaceutical
(TEVA) - Get Report
. It's an Israeli company. They actually have the biggest market share in the generics. They have one of the best manufacturing infrastructures in the generic area. They're looking like a terrific company to benefit.
Mylan has always had problems. It has traditionally had terrible management and litigation problems that I think are going to be plaguing it for years.
Fund Junkie runs every Monday and Wednesday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
imcdonald@thestreet.com, but he cannot give specific financial advice.