Edward Owens has managed Vanguard’s Health Care Fund (VGHCX) since its inception in 1984. He earned his MBA from Harvard Business School and has been an investment manager for over 30 years. Vanguard’s Health Care Fund contains foreign and domestic stocks in various aspects of the health care industry, including pharmaceutical firms, medical supply companies and research firms. Because the fund is so narrow in scope, returns often swing widely from year to year. It ranks a “5,” the highest on Vanguard’s risk scale, which they describe as “more risk, more reward.” Owens has delivered an average annual performance of 16.3% since inception, and 11.45% for full-year 2011.
Owens noted in his fourth-quarter letter that he “will continue to strive to identify early the drugs and devices with the best chances of changing medicine, as well as the service companies that are best positioned to capture opportunities along the health care chain.”
He added no new stocks to the low-turnover fund in the fourth quarter, but he did make several large increases. The stock positions he increased the most are: Hospira Inc. (HSP), CVS Caremark (CVS), Boston Scientific Corp. (BSX) and Zimmer Holdings Inc. (ZMH). Hospira (HSP)
Hospira is the world’s largest producer of specialty generic injectable pharmaceuticals, and is a leading provider of contract manufacturing services to proprietary pharmaceutical and biotechnology companies for producing injectable pharmaceuticals.
Hospira’s share price had been falling gradually since its high of about $58 in April 2011, and began trading under $30 by mid-October. Owens, who held the stock since before 2008, had been selling shares as the price went up. In the fourth quarter of 2011, when the price fell to an average of $31.50, he bought 1 million shares, increasing his position by more than 91%. He now owns 2,095,070.
The October drop was due in large part to disappointing fourth-quarter earnings reported on October 26. The company’s diluted earnings per share fell to a loss of $(0.54), compared to $0.42 in the fourth quarter of 2010. The results were impacted by “developments related to our quality-improvement initiatives,” according to the company’s CEO, F. Michael Ball. Diluted earnings per share for the nine months ended Sept. 30, 2011, were $1.21, down 31% from $1.75 in the first nine months of 2010.
Sales increased 2.9% to $977 million, compared to $949 million in the fourth quarter of 2010, mainly due to continued strong U.S. sales of the company’s oncolytic docetaxel product, but partially offset by the impact of quality actions in response to an FDA 2010 warning letter and subsequent observations related to the company’s manufacturing facility in Rocky Mount, N.C., and device quality and supply-related issues.
The company announced on October 18 that sales and earnings per share would be lower than anticipated due to actions they had to take to improve quality at the plant which caused a slowdown of production.
CVS Caremark (CVS)
CVS/Caremark is the nation's premier integrated pharmacy services provider, combining one of the nation's leading pharmaceutical services companies with the country's largest pharmacy chain.
Owens had a relatively small holding of 200,000 shares which he purchased in the third quarter of 2011 at about $36 per share. In the fourth quarter, he increased his holding by 50%, adding 100,000 shares at about $37 per share. CVS’s share price has actually increased more than 20% in the last year, and more than 21% in the fourth quarter alone.
Record-setting third-quarter earnings results, announced Nov. 3, 2011, contributed to the rise. Net revenues increased 12.5% to a record $26.7 billion. Revenues in its Pharmacy Services segment rose 25.8% to $14.8 billion, due primarily with the addition of a previously unannounced, long-term contract with Aetna Inc., and its acquisition of the Medicare prescription drug business of Universal American Corp. in the second quarter of 2011.
In the first nine months of 2011, the company also returned over $3 billion to shareholders in the form of dividends and share repurchases.
CVS has been growing over the long term as well. Its revenue per share increased at a 10-year annual rate of 11.5%, and its free cash flow per share increased at a 10-year annual rate of 21.4%. GuruFocus rated CVS Caremark the business predictability rank of 4.5-star. Steven Romick did an extensive analysis of CVS here.
Boston Scientific Corp. (BSX)
Boston Scientific Corporation is a worldwide developer, manufacturer and marketer of minimally invasive medical devices.
Owens bought 9,200,000 shares of Boston Scientific Corp. at about $8.70 per share. In the next three quarters, he bought a total of 12,900,000 more shares at $8, $6.50 and $5.75 per share, respectively. He sold a total of 800,000 shares in the fourth quarter of 2010 and the first quarter of 2011 at about $7 per share. He then bought 3,300,000 shares at about $7 per share in the second quarter of 2011, 1,800,000 shares at about $6.50 in the third quarter, and 9,900,000 shares at about $5.50 in the fourth quarter.
Boston Scientific’s revenue over the past decade has gone up and down, most recently decreasing to $7.8 billion in 2010, from $8.2 billion in 2009. Free cash flow has also decreased to $58 million in 2010 from $528 million in 2009, as the company has lost billions in earnings over the last three years, and negative retained earnings have grown from negative $174 million in 2006 to negative $4.8 billion in 2010. The company now has $276 million in cash on its balance sheet, with over $8 billion in long-term liabilities and debt.
Boston Scientific is currently broadening its business and hopes to see that impact results in the next two years. It is aiming to increase earnings by double digits in the next five years. Part of the expansion will involve launching two dozen new devices in 2012, according to Boston.com.
Zimmer Holdings Inc. (ZMH) Zimmer is a global leader in the design, development, manufacturing and market of reconstructive orthopaedic implants and fracture management products.
Owens bought 500,000 shares of Zimmer Holdings in the first quarter of 2009 at about $38 per share. He added more in the third quarter of 2010 at about $52 and has been adding each quarter since then, including the fourth quarter, when he increased his holding 20%, or by 400,000 shares at about $51 per share. He now owns 2,400,000 shares.
Zimmer Holdings has increased its revenue per share at an annual rate of 15.4% in the last 10 years, and its book value at 45%. The company released its fourth-quarter results on Monday. Its profit for the quarter more than quadrupled, to $156.6 million, compared to $34.9 million. Revenues increased to $1.17 billion from $1.13 billion the previous year, driven by “above-market performance” in its businesses in Europe, Middle East and Africa and the Asia Pacific. New product introductions also drove growth.
“While a number of our businesses continue to face some headwinds in 2011 as a result of global economic conditions, the company is well positioned to take advantage of the extraordinary long-term potential of our industry. Future growth will be achieved through continued momentum in established and emerging international markets, product innovation and incremental contributions from recently completed and future strategic acquisitions,” Zimmer Holdings CEO David Dvorak said on the fourth-quarter conference call.