Healthcare

A question from a reader about healthcare.

A couple of my favorite market people are M J Whitman and Marc Faber. I noted Marc mentioned Pfizer in Barron's Roundtable, and Marty has a long position as of 10/30/05 of a million shares of Pfizer. Both have a tendency to get into things very early. With Medicare Plan D taking hold and a recession possible, do you think big pharm might be coming into play? Any thoughts on what to play with - XLY? PHH? or pick a basket of individual stocks?

OG

The demographic demand that will be created or depending on how you look at is being created now for all things healthcare will be huge. Today’s 50 year olds will live much longer and healthier than their parents. This is partly due to innovation, partly due to lifestyle changes and philosophically speaking partly due to evolution.

Despite obvious catalysts, big American pharma has done poorly for a long time. Maybe it is turning now and maybe not, I expect I will miss a big turn when it does finally happen. Make no mistake, history tells us they will do well at some point but I will freely admit I don’t know when.

Most clients own Johnson & Johnson and Novartis for big cap pharma exposure. Novartis obviously also adds Switzerland which I like for bomb-shelter reasons. Here, assuming I do miss the bottom, clients will participate to some extent.

My ownership universe also includes a foreign second tier pharma, biotech stock, a biotech ETF, a generic drug maker, a device company and a medical testing company. No client owns every name. The mix, hopefully, blends together different volatilities, cap sizes and countries.

Some smaller accounts own the iShares S+P Global Health (IXJ). The idea behind this pick instead of one of the domestic ETFs is my dim expectation for US big pharma. IXJ has some big American pharma but it benefits from its foreign exposure.

The question asks whether big pharma might now come into play. Now? Who can say? At some point, clearly. A diversified portfolio means that you have some big pharma exposure. I am not overweight that part of the sector nor do I have plans to be. Of course I may get it wrong.