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Sector looks strong

By James L. TysonStaff writer of The Christian Science Monitor / April 12, 1999



WASHINGTON

The debate over how to meet America's soaring health-care bill continues to dominate discussion in Washington, fueled not just by growing health-care costs but what forecasters see as steadily rising demand.

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For some investors, that outlook represents an opportunity, and many experts suggest that investing in health-care companies represents an important element of a well-rounded portfolio.

Although some investors avoid health-care companies for religious reasons, they may unknowingly be invested in the industry. The popular index funds, for example, include General Electric, a company actively involved in medical technology. Many large-cap growth funds own shares of Monsanto, a pioneer in biotechnology. And the high-technology sector is sprinkled with companies engaged in business pursuits that range from genetic research to high-tech hospital machinery.

The health-care industry already represents about 14 percent of the American economy and experts predict that percentage will grow. Whether or not investors choose to participate in the industry, its continued growth is expected to be important for the economy.

During a bull stock market dominated by the brash returns of high technology, the health-care sector has quietly treated participating portfolios to persistent profits.

The Standard & Poor's (S&P) health-care sector index since 1996 has surged 170 percent, compared with a gain of 120 percent for the S&P 500 and 133 percent for the S&P banking and finance sector. Only the S&P's high technology sector has done better, soaring 285 percent.

"If you're not investing in health care, you're missing out on a substantial growth opportunity," suggests Linda Miller, manager of the John Hancock Global Health Sciences fund in Boston.

Some powerful trends, say analysts, give the health-care sector a steady lift.

*Demographics: The aging of the nation's baby boomers suggests increasing demand for health-care products and services.

*Consolidation: From drugmakers to the $400 billion hospital industry, many slices of the health-care sector are fragmented and inefficient. By merging, they streamline and boost profits.

*Innovation: New medical devices and pharmaceuticals, both conventional and biotechnological, are driving demand and profits.

"I don't want to be Pollyana-ish, the valuations [of many health-care stocks] are very high," says Ms. Miller," but the fundamentals are extremely strong and will get stronger as the world economy rebounds and many countries build their medical infrastructure."

Health-care companies face at least one significant obstacle, however - Uncle Sam.

The Food and Drug Administration has smoothed the approval process for drugs, but the process still poses an uncertainty that can cloud either the most realistic or optimistic business plan.

Health-service companies have an especially strained relation with Washington. The Clinton administration has stepped up efforts to uncover Medicare fraud. And in 1997 Congress reduced Medicare reimbursements to hospitals.

Rising costs and regulatory pressure have made the health-care sector one of stark contrasts in stock price. While stocks of hospitals, managed-care, and long-term-care companies languish, pharmaceutical and biotechnology stocks have rocketed.

"This sector has been painted in black and white to the extreme," says Miller.

Stock prices of drug makers, for example, have, as a group, more than tripled since 1996, measured by one index.

"For drug-product companies you will see sustainable, ongoing, double-digit, mid-teens earnings growth based on new products," predicts Jordan Schreiber, manager of the Merrill Lynch Health Care A fund in Princeton, N.J.

The proprietary advantage is fleeting, though, and company performance sometimes suffers after a patent expires, allowing generic competitors to undercut the price.

The goal for drugmakers, analysts say, is to ensure that innovation outstrips patent expiration. In addition to Monsanto, analysts for this sector favor Pfizer Inc., and Bristol-Myers Squibb Co.

Biotechnology companies, also among the sector's leaders, don't face problems presented by generic drugmakers to the same degree.

"When biotechnology goes to market, it's arguably more valuable [than a conventional drug] because it can't be easily replicated," says Margery Parker, co-manager of the Putnam Health Science fund in Boston.

Still, analysts caution against bio-tech stocks. Brilliant ideas that promise huge profits often face daunting production and regulatory hurdles.

"A lot of smaller stocks are just spending money and doing research," says Ms. Parker, "with no promise of earnings for years." Among larger biotechs, analysts' favorites include Amgen Inc., Genentech Inc., and Biogen Inc.