Sam Isaly
Eaton Vance Worldwide Health Sciences Fund
by Marla Brill
MFI Publisher
Top five holdings: Sanofi-Synthelabo S.A., Altana, Pfizer,
Genentech, Pharmacia Corp.
Assets: $1.9 billion
In contrast to
Jordan Schreiber of Merrill Lynch, Sam Isaly,
manager of the Eaton Vance Worldwide Health Sciences Fund since 1989 and
President of OrbiMed Advisors, an investment management firm in New York, takes
a dim view of medical device or service companies. “Except for the occasional
stock or two, we usually avoid those areas,” he says. “The services group is too
labor-intensive, medical device products have short life spans, and we think we
can get better rates of return elsewhere.”
Isaly turns to a mix of about 40 to 50 pharmaceutical and
biotechnology companies in the fund’s portfolio to get the 15 percent to 20
percent annual earnings growth he’s looking for. His universe consists of the
600 public pharmaceutical and biotechnology companies worldwide that have a
total stock market capitalization of $2.5 trillion. With market capitalizations
of $5 billion to $250 billion, the fifty largest of these companies represent 80
percent of the value of the sector’s universe. Most of them are profitable,
while the remaining 550 generally are not.
Isaly is emphasizing the smaller companies in this
universe—many of them biotechnology companies with drugs under development-- to
add some octane to the portfolio. These companies represent about half of the
fund’s assets, compared to 20 percent of the sector’s equity value.
“Stock rise the fastest just before a company moves toward
profitability, and that’s the point where we like to step in with this group,”
says Isaly. He believes portfolio holding Gilead Sciences, which recently
introduced AIDs drug tenofovir to the market “will move from losses to
exponential profits in 2002.” Tenofovir is among the new medicines developed to
combat strains of HIV that have grown resistant to antiviral drugs that patients
have used for years.
To help balance out the volatility of these smaller biotech
stocks, Isaly invests about half the fund’s assets in larger, profitable biotech
and pharmaceutical companies. Among his favorites is Swiss drug company Novartis,
which he believes is undervalued right now. Based on 2002 earnings, its
price-earnings ratio is 22, compared to 27 for the average large pharmaceutical.
Even though the Novartis sells at a 20 percent discount to
its peers, he says, its product pipeline is stronger than that of most drug
companies, which should help it achieve stronger earnings growth than its peers.
He also controls volatility through international diversification, and has about
30 percent of assets invested in foreign companies.
Even after the
strong run-up for the sector in 2000, Isaly says the sector’s valuations are
still reasonable because the stocks pulled back last year, while earnings
continued to grow at a healthy clip. “Earnings are still coming through in the
intermediate-term and the long-term prospects for the sector remain
undiminished,” he says. “How many other sectors can make that claim?”
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