Jordan Schreiber

Merrill Lynch Healthcare Fund

by Marla Brill
MFI Publisher

Assets: $850 million

Top five holdings: Wellpoint Health Networks, Cerner Corp., Amerisource Bergen Corp., Baxter International, Tenet Health Care.

The big pharmaceutical companies that represent the 900-pound gorillas of the health care industry don’t carry much weight in the Merrill Lynch Healthcare Fund. Although these companies make up two-thirds of the total market capitalization of the health care sector, Jordan Schreiber, manager since 1983, says they make up only about one-fifth of the assets in his fund.

By some measures, these stocks are selling at historically low valuation levels compared to the rest of the market. Right now, says Schreiber, stocks of big pharmaceutical companies sell at price-earnings multiples only slightly higher than the market average, compared to historic premiums of 20 percent or more.

“Premiums are relatively narrow now because investors are concerned about several industry issues, including thin product pipelines, a shortage of products coming into the market because of slow FDA approvals, and an unfriendly political and regulatory climate,” he observes. “Expiring patents could also put a serious squeeze on profits. Once generics become available, prices can drop 20 to 30 percent initially to as much as 90 percent over the long-term.”

Lately, Schreiber been investing in biotechnology companies, as well as tamer picks such as health maintenance organizations (HMOs), hospital management companies, and drug distributors. The approach “covers both ends of the risk spectrum in this sector. Biotechnology companies can be very volatile because their future depends on the success of one or two products, but they can also be very rewarding investments. It’s important to keep a balance.”

Biotech holdings include Genta, which is in late-stage development of a drug to treat lung cancer, and Idec Pharmaceuticals, which is working jointly in a joint venture with Genentech on a drug for non-Hodgkin’s lymphoma.  Schreiber mixes these lesser-known names with larger, more established biotechnology companies like Amgen that have products on the market and established sales and earnings.

 Health maintenance organizations, eschewed by some health care fund managers because of cost controls, are a part of Schreiber’s portfolio because well-run HMOs such as United Healthcare and Wellpoint Health Networks (the fund’s largest holding) are adept at overcoming the obstacles posed by cost cutting and red tape. “These HMOs have been able to raise premiums and keep costs under control. And they have very reasonable valuations, given their sturdy growth.”

 The shift out of big pharmaceuticals and into lesser-known, smaller companies in the biotechnology and health care management areas has changed the complexion of the fund. “We have a lot more small and mid-cap names now than we did a couple of years ago,” says Schreiber. “We also have less foreign exposure.”

 Less is a relative term in a fund that, in the past, has been known to have more money invested overseas than its peers. Currently, Merrill Lynch Healthcare has about one-fourth of its assets in foreign stocks, but there have been times when over half of its assets had a foreign flavor. Schreiber attributes the shift to less emphasis on international pharmaceutical giants, and more toward smaller American HMOs, biotechnology, and hospital management companies.