--After biotech surge, health-care fund checks out
health-services sector
--Services includes hospitals, insurers, drug-benefit
managers
--Fund has steadily outperformed broader market and peers, but
with some volatility along the way
By Jon Kamp
T. Rowe Price Health Sciences Fund (PRHSX) manager Kris Jenner
is on the hunt for investment ideas in health-care services after
getting a big boost from biotechnology stocks last year.
About a third of the $5 billion fund is invested in biotech
names, and while major alterations are unlikely, Dr. Jenner
believes last year's biotech surge will be hard to replicate. So in
the run-up to big changes under the health-care overhaul law, the
fund's team is looking at companies that provide, manage and pay
for care.
There are "several sectors to look at," Dr. Jenner said.
Services companies include hospitals, insurers, pharmacy-benefit
managers and others. The health overhaul for these companies really
kicks into gear next year, when coverage extends to millions of
Americans, creating a menagerie of new opportunities and pressures
for health companies.
"Fundamentally you're going to have more patients in the
health-care system, you're going to have greater payments in the
health-care system," but also new costs, Dr. Jenner said.
Recent T. Rowe Price Group Inc. (TROW) data show nearly 27% of
the fund invested in services, a third in biotechnology, 22% in
pharmaceuticals, 14% in products and devices and a small sliver in
life sciences.
Dr. Jenner believes there could be modest changes in this
make-up, although he cautioned they won't be "wholesale." The
manager--who has run the fund for 13 years--has a long-running
interest in companies bringing new and important drugs to
market.
The fund has posted total returns of nearly 31% over the last
year, about nine percentage points ahead of similar funds, and well
ahead of the Standard & Poor's 500 index, according to
Morningstar, which awards it a full five-star rating. The fund has
also outperformed peers and the broader market on a three-, five-
and ten-year basis.
The ride can be bouncy along the way, Morningstar analyst
Christopher Davis cautioned, because of Dr. Jenner's interest in
smaller biotech firms that have more hanging on single projects
than big companies. But overall, the fund's "ample rewards more
than match its risks," Mr. Davis said in a recent review.
Dr. Jenner's biotech focus was richly rewarded last year, when
the sector benefited from advances in drug pipelines, regulatory
approvals and continued merger and acquisition activity. The NASDAQ
Biotechnology Index rose 32% on the year, more than doubling gains
in the S&P 500.
Some of Dr. Jenner's biggest picks did considerably better.
Among his top-ten picks, shares of Regeneron Pharmaceuticals Inc.
(REGN) about tripled, for example, while small Pharmacyclics Inc.
(PCYC) nearly quadrupled. The fund's top holding--Alexion
Pharmaceuticals Inc. (ALXN), which makes a drug used in a rare
blood disorder and genetic disease--rose 31%.
But after the 2012 surge, "I would be surprised, very surprised,
if the fund's performance was driving by very strong biotech
holdings" this year, Dr. Jenner said.
Hence the search in health-services, where the fund already has
some major holdings. These include Catamaran Corp. (CTRX), a
pharmacy-benefit manager created last year through the combination
of two smaller firms. Catamaran is using its newfound heft to score
client wins, and Dr. Jenner expects significant share gains.
His fund's top-ten list also includes UnitedHealth Group Inc.
(UNH), which he called "the best managed and most broadly
diversified" health insurer. Dr. Jenner is interested in competitor
WellPoint Inc. (WLP) as well, but remains on the sidelines during
an ongoing CEO search.
The fund hasn't invested much in hospitals beyond Universal
Health Services Inc. (UHS), which is uniquely focused on behavioral
health, but Dr. Jenner said hospitals are among the health
subsectors on his radar this year. Hospitals are expected to
benefit from the health law's coverage expansion.
(Jon Kamp covers health insurers for Dow Jones Newswires. He can
be reached at jon.kamp@dowjones.com)
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