A Hedge Fund's Bet on Generic Pharmaceuticals
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Visium Asset Management was founded by Jacob Gottlieb in 2005. Gottlieb graduated magna cum laude from Brown University before receiving his MD from New York University Medical School. Though his hedge fund initially specialized in health care stocks, the firm now manages over $3.5 billion in its broader range of holdings. Industrials, utilities, financials, energy; you name it and Visium probably invests in it.
The following reviews the top holdings of Visium according to its most recent 13F regulatory filing. Staying true to its initial objective, Visium presently holds a large number of healthcare stocks. Its top four long equity positions occupy more than 4% each of the fund's portfolio.
First up is CVS Caremark (NYSE: CVS), which both operates retail pharmacies and serves as one of the largest pharmacy benefit management (PBM) services in the United States. This company is one of the biggest sellers of generic pharmaceuticals in the United States and markets their use on the company's website.
Shares are trading at 13 times forward earnings, and the company has consistently outperformed its major competition, particularly Rite Aid (NYSE: RAD), whose shares have been in an extensive slump for the past three years.
In fact, while CVS maintains a margin of 3.1%, Rite Aid has reported negative earnings for the past three years, losing $0.43 per share last year. S&P estimates that sales at CVS will rise about 15% in 2012 to $123.5 billion, and that comparable stores will see sales grow 4.7%. In all, CVS is both well-priced and well-positioned to take advantage of growth opportunities.
Endo Health Solutions (NASDAQ: ENDP) maintains a portfolio of both branded and generic pharmaceuticals. About 61% of revenue in 2011 was derived from branded pharmaceuticals, 21% from unbranded pharmaceuticals, and 11% from the device segment. Price-sales ratio for the stock lies at 1.3, which is low for the pharmaceuticals sector. The company is heavily leveraged with a total debt-to-equity ratio of 169%, something that investors will need to keep an eye on.
Second quarter earnings exceeded analysts’ expectations, coming in at $1.27 per share versus the anticipated $1.19 per share. The company's acquisition of a urology segment has added to its overall diversification, and it anticipates releasing a generic form of Lidoderm in September 2013.
Watson Pharmaceuticals (NYSE: ACT) is another company engaged in the worldwide marketing and sale of generic and branded drugs. Shares are trading at 14 times 2012 estimated earnings, and enterprise value/revenue for the company is at 2.2. Perrigo is more expensive than Watson in both of these metrics, as well as in price/sales, though Watson has a consensus projected 5-year growth rate that is lower than Perrigo’s and many of its peers.
Like the previous two companies, Teva Pharmaceutical Industries (NYSE: TEVA) is a global generic pharmaceutical company. The world's largest supplier of generic pharmaceuticals, Teva operates in 60 countries and owns 40 different finished dosage manufacturing sites. Its forward P/E of 7 is below that of Watson Pharmaceuticals but above that Endo’s. Teva maintains an A- credit rating and has a lean cost structure. Teva is larger than Perrigo, Watson, and Endo, which is why it is perhaps the best positioned to benefit from the increase in global demand in generics.
Generic pharmaceuticals, in general, are less burdened with patent expirations than their name-brand, big-pharma counterparts. Though there is likely to be some top-line pressure through this economic cycle, we expect generics—especially those that are “first-to-file” after a patent expiration, thereby securing 180 days of marketing exclusivity—to compete favorably with name-brand pharmaceuticals as an investment option.
This article is written by Brian Tracz and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.