Why Healthcare Is a Good Defensive Sector

I recently did an interview with the FT discussing the healthcare sector as a good defensive sector play. I answered of course that healthcare, along with utilities and consumer staples, are the classic defensive sectors. The stocks in those sectors tend to be lower beta and many are mature companies with good cash flow that pay dividends. We own many companies within the sector.

We watch the sector closely, as the head winds to growth are many, here are a few:

• The Obama health plan(s)
• The new FDA approval process coming with our new administration
• Patents coming off protection
• Generics in prescription, OTC and consumer product markets
• The risk of a drug, device etc killing a patient, and other headline risk
• The cost of developing manufacturing, marketing and sales

The industry is finding many ways to sail through these winds. Today, VC-backed Portola Pharmaceuticals entered into an agreement with Merck & Co. Inc. (NYSE: MRK) to an incentive laden deal potentially worth up to $420 million. Merck will pay Portola $50 million up front for the exclusive licensing rights to the anticoagulation drug, Betrixaban.

Merck’s $50 million investment in Portola is a promising investment for a private company. If Betrixaban gets FDA approval, it could offer a major improvement over the incumbent Warfarin, and billions in annual sales.

As the Obama administration overhauls the healthcare system, pharmaceutical companies face the increasing threat of reduced profits. Unlike years ago, many drug companies are no longer willing to invest the millions required to get a drug from concept to patient. Major pharmaceutical companies frequently rely on smaller companies to undertake the costly and risky R&D and preliminary stages.

Having smaller, nimbler firms willing to take risks for potentially exponential rewards works well for an industry in need of new (and patients in need of) improved drugs. The smaller companies can “hit the big-time” receiving millions for a drug that may never succeed and larger companies can buy the rights to a drug that could be worth billions. For years major pharmaceutical companies have relied on this tactic, making it increasingly likely that major advancements can be made, continuing an entrepreneurial and scientific discovery process. Each new discovery enhances a challenged industry and an aging world population.

Stem cell research is growing with recent changes by the Obama administration, potentially sparking more ideas and discovery for the health care industry. The uses for stem cells are near limitless and so are the potential profits.

Whichever companies can get stem cell therapies off the ground stand to make billions. The bigger winners though will most likely be the major pharmaceutical who will buy the rights to the drugs, or gobble up the smaller firms in this future trillion dollar industry.

The big pharmaceutical firms such as Merck, Johnson & Johnson (NYSE: JNJ) and Pfizer Inc. (NYSE: PFE) have the cash, manufacturing capability, marketing and detail (sales) staff to create the next multi-billion success that also may improve the lives of millions of people.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is long MRK, PFE and JNJ.

Comments

[Prudent Man...:]

Would be nice without the risks of government price fixing, excess profits taxes, increased tax schedules and, because "we won" government outright expropriation.

I do own pharma stocks in the hopes that the nations wakes up politically and halts the collectivists in government, academia and Congress before our economy is further destroyed.

That notwithstanding the demographics and genius of the industry is the place to be if our career politicians don't ruin it more than they already have.

Jul 10 10:14 AM

[a. palmer jr.:]

Defensive sector for what? In case you don't get rid of your investment money quick enough? I've had PFE for awhile now and all I see it doing is losing money+cutting dividends!

Jul 11 12:17 PM

[Chicky401:]

Pfizer has had a lot of lawsuits lately between viagra, depo provera and celebrex but I am sure they will make it through and bounce back. I do not have stock in them and haven't really followed them but have taken one of the mentioned drugs, which is how I learned all about their lawsuits. They are a solid drug company though with many other successful drugs, they shouldn't hurt in the long run.


On Jul 11 12:17 PM a. palmer jr. wrote:

> Defensive sector for what? In case you don't get rid of your investment
> money quick enough? I've had PFE for awhile now and all I see it
> doing is losing money+cutting dividends!

Jul 12 12:41 AM