(MAHCX) Merrill Lynch Healthcare
|Managing Fund Since |
April 4, 1983
|Asset Size |
|1-Year Return / % Rank in Category |
50.2% / 51%
|5-Year Return/ % Rank in Category |
27.9% / 15%
|Load / Annual Expense Ratio |
5.25% (class A shares) / 1.26%
|Top Holdings |
HCA-The Healthcare Co. (HCA)
QLT Phototherapeutics (QLTI)
|Source: Morningstar. Holdings as of June 30. Performance as of Aug. 9.|
Health care and biotechnology funds are up a whopping 38.9% since Jan. 1 -- almost double runner-up real estate funds. Biotech shops -- cutting edge drug makers -- have been hot, but many big-cap pharmaceuticals have struggled. What's ahead for the only sector fund category that's kept last year's pace? We huddled with Jordan Schreiber, who's managed ( MAHCX) Merrill Lynch Healthcare since 1983. That gives him the longest tenure of any current health care fund manager. He thinks the sector might cool, but sees good things ahead next year and his most recent buy for his own portfolio was a financial stock. Read on.
1. Health care is way out in front of the other industry sectors this year. Is there more gas in the tank or will the sector cool a bit in the second half of the year? Schreiber: You have to look at the subsectors. In pharmaceuticals, I see calming down looking forward. First, because of the political pressures surrounding the election, despite the attractive fundamentals and increasingly attractive relative fundamentals as the economy slows. I don't see any real downside in the drug area, but I can't see any robust upside. But I can see a resurgence next year. Even with drug price cuts I think there's a good chance the pharmaceutical group will actually come out as a net beneficiary as the presently uninsured become customers, albeit less profitable customers. I could see pharmaceuticals maybe being somewhat subdued in the near term, but picking up after the election. Biotechnology, I think, will be caught up in this glut of IPOs that are going through the roof right now. And I see a balloon, a continuing robust up-performance, followed by pullbacks as the IPO glut ensues. Some of the specialty companies are richly valued at this point, but some of the service companies, I think, are reasonably attractive. I'm speaking of HMOs and hospitals. I think hospitals are an especially attractive niche, because the government is restoring some of the Medicare cuts they put into effect two years ago and this is flowing right into the coffers of the hospital companies. 2. What health care industries and stocks look strongest to you now? Schreiber: Here and now, it's the genomics companies. These are the biotechnology companies that are involved in genes, protein discovery, gene function -- all the myriad of developments associated with this set of advances. The companies that I find very interesting are Millennium Pharmaceuticals ( MLNM), which has moved from gene sequencing and discovery to determination of function; Lexicon Genetics ( LEXG), which is involved in gene function through its huge library of mouse embryos; a company called Orchid BioSciences ( ORCH), which is involved in identifying mutations in genes associated with cancer and other diseases. Right now and down the road, because of political developments, there are the pharmaceutical companies. They're out of favor and they should be out of favor because of political concerns, but the fundamentals are excellent. As the economy slows, assuming it slows and I do assume that, they're steady growers and could become a superior performer, in my judgment. I'm looking beyond the election here; obviously they're pressured by the political diatribe that's going on right now. In this area we've leaned toward companies with new products primarily, and Eli Lilly ( LLY) at this point, with two recent discoveries, is our top choice. We also like American Home Products ( AHP) and Pharmacia ( PHA), among the leaders in this field.
On Wednesday, the day after this interview, Lilly In terms of hospitals, we like the HMO HCA ( HCA), which is one of our large positions. Tenet ( THC), which is a very attractive one, and more reasonably valued. Also, we like Lifepoint Hospitals ( LPNT) and Triad Hospitals ( TRIH). 3. On the flip side, what parts of health care do you see right now as being the least attractive, and what are some companies that might be under pressure for some time? Schreiber: I think the field as a whole is very attractive, speaking of health care in general. And I'm really hard-pressed to come up with things that are not attractive, in terms of sectors. I would say that some of the specialty companies, on a valuation basis, are probably less attractive. I'm speaking of companies involved in ophthalmology and orthopedics and specialty areas, which have had a very strong run in the past year and are selling at valuation levels where perfection is already discounted. Companies in this area would be like Bausch & Lomb ( BOL). 4. Election years are often tough on pharmaceuticals. This time investors are worried that the incoming president might cap drug prices or take other steps to help consumers, which might pinch company profits. What's your take this year? Schreiber: There are two key political issues: drug prices and the so-called Patients' Bill of Rights, and that relates to one's choice in selecting a doctor without an HMO precluding this freedom of choice. Now the more important thing, I think, is the drug-price issue. There will be a change. The two parties are apart, but not on the need for drug-price reduction. And extension of Medicare to include outpatient drug issuance, there's no issue there. The question is, how to administer it? The Democrats have leaned towards the government overseeing the program, and the Republicans would like private, in this case, insurance companies, to oversee this. The outlook, based on the election, is probably secondary. The Republicans would love to enact something at this moment, but the Democrats have a good issue and they don't want to acquiesce. So probably nothing will happen until next year. It's remotely possible that something could happen this year, but I doubt it. The stumbling block in this whole thing is not just government per se but the Health Care Financing Administration, which is thought to be loaded with clerks who don't know the first thing about practicing medicine, and who prevent patients from getting the advanced drugs that they want and are constituting an unnecessary bureaucracy. Doctors hate HCFA, patients hate HCFA, and the Republicans, I think, would accept governmental oversight of the program, but an agency other than HCFA, and my guess is that some compromise along those lines will probably take place. On the Patients' Bill of Rights issue, it doesn't follow political lines as closely as one would think. The parties are not so far apart, and it's very possible that something will be enacted next year no matter who wins. 5. Everybody talks about the Human Genome Project, but what exactly is it? And what are its implications? Schreiber: I'm trying to come up with an analogy that is universally understood and I guess the best thing I can come up with is the dictionary. A dictionary is a reference work, if you want to know how to spell a word or what the word means or homonyms or phonetic pronunciation, it's a reference work. You'd buy one, you'd put one on your shelf, and it'd be the launching pad for more use of the English language in terms of writing or speaking, and the gene sequence, in a way, is similar. What Celera Genomics ( CRA) has done provides a reference work for those companies involved in discovery. Their end purpose is to discover drugs. And this is the starting point. The genes produce proteins, the proteins are involved in specific disease states. To identify what the function of the genes are, one must see what normality is, and how does this effect, who is missing, what has changed from the norm and thereby constitutes a diseased state. What proteins may interact with these mutations? And how are the proteins derived, where do they come from, what genes do they come from? So there's a long sequence of steps. 6. Which is the best pharmaceutical company in terms of having the best drug pipeline and being the best on the research end? Schreiber: This is a moving target. At the moment, just looking quantitatively at the pipeline, Pfizer ( PFE) is way ahead of everyone, but pipelines are not constant things, the products not only get improved, but sometimes fall by the wayside. And Pfizer has had a lot of products fall by the wayside. But I still would put them at No. 1 at this point. Merck ( MRK) has a drought -- at one point you could have said they were No. 1. Lilly has reinvented its company several times in terms of its business mix rather miraculously, but they have excellent research capability. If there's anything to the Elon/American Home's Alzheimer's therapeutic vaccine, that will be a major, major product. It's pretty early to make any judgment at this time; it will probably be a year and a half. Late 2001. Lilly has an early stage septic shock product, which is also extremely important. 7. Are there some industries within the health care sector that are undervalued right now? Schreiber: There really aren't any values using the conventional term in the pharmaceutical area. We're a global fund and we look overseas, and some of the European pharmaceutical companies are much more reasonably priced, likewise in Japan. 8. Do you see some mergers coming? Schreiber: Well, we've sort of run out of many of the drug companies. There are a couple of other possible deal-involved companies, American Home being one, but there's a stumbling block in there, the litigation problem with phen-fen. But in general in the U.S., I think for the large pharmaceutical companies we've seen most of the integration, most consolidation. I do see consolidation among some of the specialty companies. There's probably too many corneal sculpting companies, and it's an attractive area and any company involved in ophthalmology should have exposure in this area. VISX ( VISX), for example, probably would be an attractive acquisition for somebody and we own the stock. 9. If you had to pick three stocks today to hold for five years, what would they be? Schreiber: I guess I would take Millennium, Lilly and American Home Products, which is a way-out one in this context. Millennium because they've been able to lead the sequential change, lead the direction of research and product development in the genomic field. They moved from sequencing and discovery to gene function through very nimble management. I can see them being a leading force in any direction that genomics takes. I'd take Lilly because they have two very important new drugs coming. As for American Home Products, which I think has been put under wraps, its potential has been obscured because of some legal problems, but the legal problems will fade, there will finally be some settlement of the phen-fen lost a patent-court case, allowing generic-drug shop Barr Laboratories ( BRL) to start selling a knockoff of Lilly's lucrative antidepressant Prozac next February. Lilly shares fell 30% Wednesday, but on Friday Schreiber said he hasn't sold his Lilly shares and still believes the firm's upcoming drugs make it a solid investment. problem . Their legal problems are the recall of phen-fen, the anti-obesity product where people had heart valve irregularities in a small number, but there were a large number of claimants, and it's very difficult to get those types of suits resolved, but it's moving ahead. And the company has a quite attractive pipeline to new drugs, including a collaboration with Elon on an Alzheimer's vaccine. 10. What was the last stock you added to your fund, and what was the last one you added to your personal portfolio? Schreiber: They're not the same. Personally, I bought some Bear Stearns ( BSC) when the president made an announcement about a possible sellout at a rich price, the undervaluation became very clear. And I had just successfully liquidated my holding in PaineWebber ( PWJ). In terms of the fund, we just bought some in an IPO. Luminex ( LMNX) was the last one.