FUNDVIEW-Mid-cap pharma attractive as patent wells run dry

Thu Aug 13, 2009 6:49am EDT

* Big Pharma seen targeting mid-cap cos with proven drugs

* Alcon, Allergan, Shire likely targets

* Pharma services cos to gain from generics cycle

* Not enough clarity for small-cap bets

By Jennifer Robin Raj

BANGALORE, Aug 13 (Reuters) - As big pharmaceutical companies seek replacements for blockbuster drugs that lose their patents in 2011 and 2012, investing in mid-tier companies with proven products could be a good bet, the manager of a healthcare-focused fund said.

Earlier acquisitions of one large drugmaker by another have succeeded in cutting costs but have sometimes led to reductions in productivity of research and development, said Derek Taner, lead portfolio manager of AIM Global Health Care Fund (GGHCX.O).

"What they appear to be doing now is targeting smaller companies that are big enough to move the needle but not big enough to disrupt any sort of corporate culture, or things that are incremental or additive on the R&D side," he said.

"The companies that fit that profile, that are innovative, have good platforms and products that will fill that 2011, 2012 patent hole, would include companies like Alcon ACL.N, Shire (SHP.L) and Allergan (AGN.N)."

The fund, which has current total net assets of $968 million, also holds positions in Genzyme Corp GENZ.O, Amgen Inc (AMGN.O) Gilead Sciences Inc (GILD.O) and Bayer BAYG.DE.

"Instead of owning the Pfizers and Mercks that are doing the buying, we'd rather own the potential targets of these guys," Taner said.

The fund, which invests about 20 percent of its assets internationally, is significantly underweight on large-cap pharmaceuticals.

Despite inexpensive valuations, growth concerns stemming from patent issues and poor pipelines will keep a lid on large-cap stocks, Taner said.

During the last quarter, the fund eliminated its position in Pfizer Inc (PFE.N). The drugmaker's acquisition of Wyeth WYE.N does not fully fill its patent hole, and Pfizer has very little in the pipeline, Taner said.

The fund also reduced its positions in Wyeth and Genentech after the companies agreed to be bought.

The fund had a total return of 13.23 percent year-to-date as of Tuesday, compared with a 4.99 percent gain in the MSCI World Health Care Index.

BETTING ON INTERMEDIARIES

Another sector that will benefit from multibillion-dollar drugs going generic is pharmaceutical services, Taner said. Some of the fund's biggest additions since March have been CVS Caremark Corp (CVS.N), a drugstore operator and pharmacy benefit manager, and McKesson Corp (MCK.N), a pharmaceutical wholesaler.

"For us, it's a better approach to say all these drugs are going to go generic," Taner said. "We don't care who genericizes them. We know that the healthcare services intermediaries are going to benefit from this, and that's how we are going to play it."

The fund also holds positions in Medco Health Solutions Inc MHS.N and Express Scripts Inc (ESRX.O).

LEERY OF SMALL-CAPS

Within the healthcare space, Taner is wary of small-cap biotech companies as they tend to release limited data on their drugs.

"You don't start to see the warts till later on in the process," he said.

"It's just a tough space to invest in for a variety of reasons. These companies are not really undiscovered. There are people scouring the entire universe of market caps looking for ideas." (Editing by Mike Miller)

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