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Looking At Robert Bruce’s Two Huge Healthcare Bets

September 06, 2011 | About:
On June 30, 2011, Robert Bruce (manager of the Bruce & Co. portfolio) added significantly to his position in Abbott Labs (ABT), on top of his large position in Pfizer (PFE). His big healthcare bets fly in the face of investor fears about the patent expirations that challenge these companies, and the threat of governmental roadblocks in emerging markets. Despite this, recent market volatility has caused investors to rush towards the defensive equities.

As a result, the generally defensive healthcare sector has outperformed the market by a significant margin. Pfizer (PFE) has slowly integrated its acquisition of Wyeth over the years, and trades at a small premium relative to other pharmaceutical companies. This is in part due to their immense pipeline, with 25 drugs undergoing phase 3 of clinical trials and 10 applying for FDA registration. There are very exciting drugs already in registration, such as Axitinib (for advanced renal cell carcinoma) which will give Pfizer additional presence in the booming oncology medication market.

Since May, Pfizer has dropped about 14 of its projects, but the sheer number of drugs that could soon be on the market is stunning. The expiration of Lipitor, which will occur this November, is a huge setback for the company, however. In 2011, according to the latest quarterly report, Lipitor alone accounted for almost 20% of the revenue for the pharmaceuticals division.

Abbott Labs (ABT), being the bigger holding in the Bruce portfolio is trading at a lower multiple (about 15.5 on ABT relative to 17.3 for PFE) but has a slightly lower yield (3.8 for ABT, 4.3 for PFE). It’s best-selling drug Humira, which is the leader in the anti-inflammatory market is set to expire in the distant year of 2016. Abbott is especially strong in molecular diagnostic products, which is an increasingly important part of healthcare.

Two new products have been approved in August, providing ABT with new ways to expand revenue in its market niche. Genetic probes have become increasingly necessary in providing an accurate prognosis for oncologists around the globe, and Abbott has delivered. It’s new FISH assay for finding genes relevant in the progression of Chronic Lymphocytic Leukemia, and the ALK gene test for non-small cell lung cancer are highly efficient and reliable improvements in the world of genetic testing.

Overall, when analyzing the prospects of these two pharmaceutical companies we can see what Robert Bruce might have been thinking. Pfizer (PFE) has arguably the best pipeline in the drug market, with dozens of potential medications to compensate for the loss of Lipitor (although the loss will hurt in the short term). Abbott (ABT) is well positioned to expand into the quickly growing diagnostics subsector, has a blockbuster drug (Humira) to continue profits to at least 2016, and boasts a variety of marketing partnerships on other drugs which won’t be falling off the patent cliff just yet.

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Penguin Capital Markets
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