Miller Tabak Fund Manager Says Investors Are Ignoring the Upsides in Healthcare
In October, New York-based investment firm Miller Tabak launched the Health Care Transformation Fund (MTHFX), which invests in managed care, biotech, pharmaceuticals, and medtech companies. Its top holdings include New York area pharma giants Bristol-Myers Squibb (NYSE: BMY) and Merck (NYSE: MRK), as well as Boston-based biotech Momenta Pharmaceuticals (NASDAQ: MNTA).
The fund’s manager, Les Funtleyder, is the author of the book Health Care Investing (McGraw Hill 2009), which is part of the curriculum at Columbia and other universities. Funtleyder isn’t shy about predicting that investors in 2013 are going to look back and wish they had invested more in healthcare today.
Funtleyder took some time recently to talk with Xconomy about why he believes the upsides in healthcare outweigh the downsides.
Xconomy: Why the name “Health Care Transformation?”
Les Funtleyder: The overlying theory of this fund is that we want to invest in companies that can improve quality, lower costs, increase access, or innovate in healthcare. That’s what we’re looking for on the long side. On the short side we’re looking for companies that do the exact opposite of that. Anybody who causes damage to the system—like increasing costs or making me-too drugs—we’re looking to short.
X: In what sectors of healthcare have you increased your presence recently?
LF: The action this year in terms of upside has been in biotech, and in particular in the anti-infectives like drugs to treat hepatitis. And there has been a little action in oncology, too. Investors are moving back into healthcare in general, but they seem to be a little bit more optimistic about biotech companies, whereas in the last two or three years they really hadn’t been.
X: What are some off-the-radar companies in biotech you like?
LF: I point to Opko (AMEX: OPK) and BioCryst (NASDAQ: BCRX). BioCryst is in gout, Opko is in a number of areas. They haven’t worked yet. They’re going to take time to develop. But we go and look at asset values. We’re looking for a collection of assets that’s trading below what we call the private market value. So if we wanted to go out and 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: ISRG), device maker Varian Medical Systems (NASDAQ: VSEA), and Illumina (NASDAQ: 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.