Tony Butler, managing director and senior health care analyst at Barclays Capital, talks to Institutional Investor contributor Fran Hawthorne about investing in health care.
Institutional Investor: Is this a good time or a bad time to invest in health care?
Butler: This year has not been a good time to invest in health care, but we actually changed our view on the pharmaceutical sector in the middle of this year, because this may be the best late-stage product opportunity that I’ve seen over the past decade. Of course, it may be that it all fails.
What happened? For years everyone has been saying, “The drug pipelines have all dried up” and “Genomics is taking longer to lead to drugs than we expected.”
Maybe what we didn’t know is that the product cycle just takes this long now.
Which products and companies are particularly promising?
There’s a lot of interesting stuff coming out for Alzheimer’s disease. There are still opportunities in cardiovascular disease and rheumatoid arthritis. For example, Bristol-Myers [Squibb] — a company that should have died three times this decade – it has a late-stage antibody against melanoma. It also has an oral diabetes drug that would be a new mechanism in diabetes, and its biggest opportunity is a drug against stroke [apixaban] that would replace Coumadin. [The drug, which Bristol-Myers Squibb is developing jointly with Pfizer, did so well in a trial of 5,600 patients that it was ended early in August.]
What other companies have good prospects?
Merck is working on a drug for hepatitis C, a drug against acute coronary syndrome, and a drug to raise HDL [“good” cholesterol].
Are there other reasons you think pharmaceuticals are the most promising sector in health care?
Because of their dividends, and because they’re awfully inexpensive. The average dividend yield for U.S. pharma companies is 4.3 percent. For the S&P [Standard & Poor’s 500-stock index] in general, it’s close to 2.5 percent.
Has the Food & Drug Administration gotten tougher?
It has slowed things down and it has also gotten tougher, because the FDA is requiring longer trials and trials against active comparers, not just against placebos. It’s because Congress got involved and scared the FDA over things like Vioxx [the painkiller withdrawn by Merck in September 2004] and Avandia [a controversial diabetes drug from GlaxoSmithKline].
That would seem to discourage investments in the pharma sector.
The drug companies have caught on, and in the last few years they’ve minimized a lot of the garbage around side effects. A lot of genomics have been able to help. I know a drug works against a specific target. I’m designing a chemical so finite that it binds against what I want it to bind to.
So genomics is helping in the development process. But when will genomics also produce actual drugs?
We’re getting the cost of sequencing your genome down to a manageable level. Now we can do it for about $15,000 to $30,000. I think it’ll go to down to below $1000 within three years. We’re five to 10 years away from improving overall health based on genomics alone.
Which diseases will be the first to get genomics-based drugs?
It has to be cancer, because that is a mutation.
Which cancers?
The easiest things to look at are breast, colon, and nonsmall-cell lung cancer – the largest, solid tumors.
Will we continue to see more big drug company mergers? Who’s left?
I guess we could. But I don’t know that mergers have done anything to improve research or outcomes. What happens when two weak guys together? When mergers occur, the good people leave. There’s no improvement in productivity.
Where does health care reform fit into the picture?
I thought once this bill passed, we’d actually get a rally, and we didn’t. Will it be possible that at least with some of the large-cap pharma names and maybe some of the large-cap biotech names, maybe some of the HMOs, would we actually see investors moving back into this space?
Why?
Because they’re less subject to the undulations of economic sensitivity. HMOs have exceeded estimates on revenues, for instance. They’re not affected by what’s going on in other parts of the economy outside the U.S.
Which other sectors benefit from health care reform?
Hospitals will be the biggest beneficiary, because bad-debt expense goes down. But most sectors don’t see the effects until 2014.
So is it too soon to buy?
I’m not sure I would do it for health care reform reasons. I would look at it principally for fundamentals
Fran Hawthorne is the author of the award-winning “Pension Dumping” (Bloomberg Press) and “Inside the FDA: The Business and Politics behind the Drugs We Take and the Food We Eat” (John Wiley & Sons). She writes regularly about finance, health care, and business ethics.
