Drug Stocks Down, Not Out

by Alan Lavine and Gail Liberman

What’s up with drug stocks?

Kris Jenner, portfolio manager of the T. Rowe Price Health Sciences Fund, says drug company stocks may be down, but don’t count them out.

The health care industry faces many challenges, including a slowdown in drug introductions, competition from generic drugs and the withdrawal of some prominent drugs from the market due to safety concerns.

Nevertheless, “so long as society continues to desire new medicines and therapies to soften the impact of disease, health care remains an area of tremendous growth for the long term,” he says.

Jenner says positive factors that bode well for drug company stocks include:

• The Food and Drug Administration’s policy of speeding up drug approval—despite anticipated minor changes due to recent problems that triggered the withdrawal of some drugs from the market.
• Profits are expected to outweigh generic drug company challenges.
• The high price of cancer medicines is a tremendous stimulus for innovation—even though he expects price controls to remain an issue.

The great drawback to the drug industry: In reaction to high- priced drugs, many are buying drugs in Canada and other countries. Eventually, U.S. drug companies, he says, likely will offer the same price for its products worldwide.

"It's a serious threat to U.S. drug companies,” he says. “As it stands, there is very poor public policy on drug importation on many different levels, the least of which is safety. Ultimately, I believe the industry has to price its products on a worldwide basis."

Although drug stocks are undervalued, Jenner warns that it could take several years before they rebound.

He says he prefers smaller biotechnology companies to large ones. Plus he’s looking for new and important medicines that will meet an unmet medical need.

But he doesn’t rule out large drug company stocks. Factors that could bolster health care sector returns over the next five or 10 years, he says, include: The graying of America, the number of unmet diseases that lack good therapies, and tremendous scientific advances that should lead to safer and more effective drugs.

In addition, he says, there is a tremendous desire to live longer and have a higher quality of life.

Companies he believes have blockbuster drugs:

• Sanofi-Aventis.
• Genentch.
• Pfizer
• Sepracor

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.