Time to Increase Investment in Healthcare?

Absolute-return funds, which aim to make money regardless of the market’s zigzags, are hot these days. For example, Putnam Investments introduced four Absolute Return funds since Jan 2009: 100, 300, 500 and 700. Their goal is to beat inflation by one, three, five and seven percentage points, respectively. Putnam devised the 100 fund as an alternative to money market, and the 300 fund as an alternative to bond funds. The 500 and 700 invest in stocks, commodities and REITs.

This Friday S&P stands on 877. With its estimated earning for 2009 of $50, PE is 17.5 (877/50). Maybe it is time to re-balance your portfolio by taking out some money and move to other places. With record low interest rate, money market (100 fund) or bond (300 fund) is clearly not a good place.

Last Sunday, April 26, 2009, Chris Paradysz, CEO of my company, established a new cycling record of 416 miles biked in 24 hours at the Valley Preferred Cycling Center, PA. He did it to honor his daughter’s fight against Lupus, a chronic and potentially fatal autoimmune disorder affects over 1.5 Americans.

With growing number of unknown diseases, aging population and potential widespread of Swine Flu, Healthcare is one of defensive sectors. Major drug manufacturers industry accounts for more than half of its market cap, as shown in table below.

Industries	Market Cap ($B)		%
Biotechnology	187.9		12.1%
Drug Manufacturers - Major	809.8		52.2%
Drug Manufacturers - Other	124.6		8.0%
Health Care Plans	79.9		5.1%
Medical Appliances & Equipment	100.9		6.5%
Medical Instruments & Supplies	157.4		10.1%
Others	91.2		5.9%

Coincidently or not, over last 3 weeks, all three major drug companies posted around 8% revenue drop in the 1^st quarter of 2009: Johnson & Johnson (JNJ), Pfizer (PFE) and Merck (MRK).

1. On April 14, Johnson & Johnson reported 2009 first quarter sales decreased 7.2% while EPS was equal to a year ago. The company confirmed its earnings guidance for full-year 2009 of $4.45 - $4.55 per share. A week later it also announced a 6.5% increase in the quarterly dividend rate, which is the 47th consecutive year to increase dividend. At the new rate, the indicated dividend on an annual basis is $1.96 per share, or 3.7% yield. Its PE is 11.7 ($52.26/$4.45).
2. On April 21, Merck reported a sales decrease of 8% compared to the first quarter of 2008. It re-affirmed full-year 2009 EPS range of $2.84 to $3.09, including Schering-Plough merger-related expenses. Its PE is the lowest among big 3: 8.5 ($24.2/$2.84).
3. On April 28, Pfizer posted a 8% drop in first-quarter revenue. For full-year 2009, it estimated a diluted EPS range of $1.20 to $1.35, which reflects cost of pending Wyeth acquisition. PE: 11.3 ($13.51/$1.2).

There are 4 Healthcare ETFs with assets over $1B, as shown in table below. Interesting enough, there is only one short Healthcare ETF, RXD, with assets of a tiny $14 million. As a comparison, UltraShort Financials ProShares (SKF)’s asset base is $1.25 billion.

Fund Name	Ticker	Net Assets
Health Care Select Sector SPDR	XLV	2.17B
Biotech HOLDRs	BBH	1.41B
Pharmaceutical HOLDRs	PPH	1.40B
iShares Nasdaq Biotechnology	IBB	1.29B
UltraShort Health Care ProShares	RXD	14.06M

Potential huge ongoing lawsuits, dangerous side effects, diminishing pipeline as well as growing competitions from generic such as Teva Pharmaceutical Industries Ltd. (TEVA) and Mylan, Inc. (MYL) might cut major drug companies’ earnings. However, with projected 2009 PE of 11 and higher yield than S&P and Treasury, I am willing to beef up investment in the healthcare sector.

Source: All data are from Yahoo Finance as of 05/01/2009.

Disclosure: I have a long position on PPH.

Comments

[YoYoMama:]

In addition to TEVA and MYL, CPD and PDLI are worth looking into in regards to foreign or generic drug manufacturing.

May 03 10:00 AM

[jimmy Turano:]

05/05/09 THREE STOCKS TO BUY IMMEDIATELY, TICKERS 'LLY','AMLIN','ALKS', IF DIABETES DRUG APPROVED, NOT ONLY WILL IT BE CONSIDERED A BLOCKBUSTER BUT A MEGA BLOCKBUSTER.
OR THE 2011 JANUARY CALL OPTIONS TOO.

May 05 05:21 PM

[jimmy Turano:]

HAO JIN, GOOD ARTICLE. YOUR EXPERTISE IS NEEDED ON 'MRNA'. MRNA, FORMERELY NASTECH LICENSED FROM THE CITY OF HOPE, AND NOW HAS MADE TWO DEALS, ONE WITH ROCHE AND THE OTHER WITH NOVARTIS, WITH REGARDS TO RNAI THERAPEUTIC PLATFORM. AT THIS POINT, MAY 7TH, AS AN INVESTOR, MRNA IS AROUND $.85CENTS, HOWEVER, SOON THEY MAY ANNOUNCE A REVERSE SPLIT TO COMPLY WITH DE-LISTING. I GUESS MY QUESTION IS, ISN'T THIS STOCK TO SPECULATIVE, AND LIGHT YEARS AWAY SORT OF SPEAK, FROM ANY SUCCESS AND REVENUE TO INVEST IN TODAY?

May 7, 2009 12:47 PM

May 07 03:59 PM