recreate that set of assets—whether it’s pipeline or product or intellectual property—we want to be able to go out and buy it on the public market more cheaply than it would be to recreate it. And it’s really important to have a good management team in small caps.
X: Three of your picks in medtech are robotics maker Intuitive Surgical (NASDAQ: [[ticker:ISRG]]), device maker Varian Medical Systems (NASDAQ: [[ticker:VSEA]]), and Illumina (NASDAQ: [[ticker:ILMN]]), which makes gene sequencing equipment. Why these companies?
LF: True to our name, we’re looking for transformational stocks. We think there’s a growing recognition that companies like this that can get people out of the hospital sooner—or in Illumina’s case, develop better drugs—will improve the healthcare system. We think their true value hasn’t been recognized yet.
X: What’s to like about Big Pharma?
LF: We started the fund in October because we thought all of healthcare was undervalued. In pharma, you’re talking about single-digit price-earnings ratios, reasonable growth rates, and big dividends. Things like patent expirations are already priced in. We have a big position in Bristol, for example. They just got Yervoy approved. Apixaban [cardiovascular] and dapagliflozin [metabolics] look promising. We understand Plavix is going generic, but we think the dividend is safe. So there’s a 5 percent dividend, a pipeline that looks promising, and a reasonable valuation.
X: Why are healthcare stocks still undervalued?
LF: They were overly depressed related to healthcare reform. And there was an investor preference for cyclical stocks, like energy and technology.
X: Is healthcare reform still a risk to these stocks?
LF: If there’s anything, there might be some alterations in the [FDA’s] 510(k) approval process. That might hurt medtech. Biosimilars might hurt some people in biotech. But we don’t know yet. The biggest thing that might hurt healthcare is the discussion about the deficit reduction. Medicare and Medicaid account for something like 40 percent of all healthcare costs. To the extent that there’s pressure on those rates, which I think could happen, that might be a risk. The headline is that we think we’re OK until the 2012 election.
X: New York state has been trying to participate in healthcare’s upside by launching a number of public and private funding initiatives designed to keep innovative biotech and medtech companies in the state. What do you think about that?
LF: New York is a bit behind Massachusetts and California, and there is a lot of competition. I was in Hong Kong last month. They’re working on it, too. So it’s become a global race now. But New York has seen the light and is starting to come around and put more effort behind it. Biotech and pharma take a while. So the fruits of New York efforts aren’t going to show up for a couple of years.
X: What are your top three tips for healthcare investors?
LF: First is to invest on the side of the angels, meaning it’s in everybody’s best interest for companies to develop innovative drugs, and cost-saving products and services. So look for those kinds of things.
Second is to remember that valuation matters, but it’s not the only thing that matters.
And third is know your competencies. Know what you’re good at and know what investing classes work best for you. It’s very important in healthcare, because not everybody can do everything. It’s very risky to buy into something just because it’s hot or you read about it in the news. Occasionally you get these healthcare fads, like antisense technology, or genomics in the late ’90s. You’ll hear about it, it will sound great. But if you don’t really know what’s going on, you want to avoid that.
