Health prospects look good for 2004

Deane Donnigan, joint manager of the Framlington Health fund, says that 2004 will be a year of meeting expectations, getting products approved and “making the numbers” for healthcare firms.
Donnigan says last year’s good performance by healthcare stocks was driven by an uplift in sales. The climb was from very depressed levels and investors are unlikely to see similarly strong growth this year. Donnigan believes Avastin, the new blockbuster cancer drug from Genentech, will act as a catalyst for the sector generally.
The fund is still underweight in the large pharmaceutical stocks. Donnigan sold out of GlaxoSmithKline and Eli Lilly at the end of last year and now holds only Pfizer in this area. She points to recent statements by GlaxoSmithKline that illustrate the problems of generic products for the major pharmaceuticals’ blockbuster drugs. There will be another big round of patent expiries in 2006.
The IPO market for biotech stocks is opening up. Donnigan says better companies are coming to market and the market is becoming more receptive. She cites companies such as EyeTech, which has a product in the late stages of clinical trials and is backed by Pfizer. Biotech currently makes up 34% of the portfolio.
Recent purchases in the fund have been in the services area. Donnigan has been building on positions in health maintenance and pharmacy benefit organisations. She adds: “We are not investing in the large traditional hospitals; we prefer rural hospitals. We like Psychiatric Solutions and United Surgical Partners. We are playing the continuing theme of as much being done through outpatient treatment as possible.”
Donnigan has recently taken profits in some of the smaller names in the fund, and is “keeping an eye” on the large pharmaceutical stocks in case the market becomes more risk-averse and defensive. She admits this may be caused by rising interest rates, but adds: “I have seen no evidence to show a rapidly rising interest-rate environment. It may start to be an issue towards the second half of the year.”