Friday, August 15, 2008

Bruce Berkowitz Stays In The Sunshine

The fund has been busy buying health care stocks, ranging from generic drug makers to health maintenance organizations. What do you like about the health care sector right now?

There are predictions about the demise of this industry, with a new president coming in. The bottom line is that we want--especially baby boomers--to live until we're 100 years old. We want a very high quality of life until the last day. The unintended consequence is that health care costs are going to skyrocket. The only chance we have to control skyrocketing health care costs, while still trying to improve services, will be through the large HMOs.

But investors might be worried about committing capital to pharmaceutical and managed care companies because we don't know who will be in the White House next year and what that change in administration will mean for these industries.

So there is a simple question: Who else will do it? Barack Obama talks about having health care like they have in Congress. Who does the health care in Congress? It's the HMOs. The government can only write a check. When all you can do is write a check, you can't control costs. So costs will go through the roof, even more so. The government needs the HMOs. Who helps the government develop the pricing that's paid for products and services? It's the HMOs. The HMOs are the system. Then look at the pharmaceutical industry, which develops these miraculous drugs.

One of your top picks is drug giant Pfizer. How come?

$17 billion of free cash, which turns out to be over $2 per share of free cash for a triple-A quality company. This is the largest pharmaceutical company in the world trading under $20 per share.

Let me make sure we all understand what I mean by free cash: It's the amount of money that is possible to pull out of the business without hurting the franchise. Ten years ago, everybody loved Pfizer. It was trading between 40 and 50 times earnings. Today, it's under 10 times earnings and nobody wants it.

How come?

Because they are all worried about Lipitor and the new president. Lipitor doesn't come off patent for another three years, and the company is dramatically changing. There is a new CEO with a wonderful strategy.

You will see Pfizer, in my opinion, do a lot more joint ventures. I think they will become almost like Exxon Mobil, which is really a merchant bank that has the distribution, size and cash to partner up with a lot of people around the world. Pfizer will do that. People just don't realize the number of joint ventures they have and the power of their distribution channel.

Also, the pharmaceutical companies in the past have been quite stodgy and lazy in not pursuing generics. They have given the generics away. I don't think we will as much now. We will see Pfizer become a larger generic manufacturer. As their drugs go off patent, you will see them compete more with the generics too.

They are the 800-pound gorilla. They and UnitedHealth have one-fifth of the entire insured population in the United States. That's it. They are the answer.

The problem now is that everybody is blaming everybody else: the doctors, the insurance companies, the government, the patients. Things have to change. The system needs to change more toward wellness. You should not be able to get a new pair of knees if you are 300 pounds overweight and you haven't made a valiant effort to lose weight. What's the point? You will just blow out your new knees. There has to be a huge shift. It is starting with the baby boomers as they try to keep their weight down and do some exercise. If the shift doesn't happen, then the costs are going higher and higher.

Frankly, the companies aren't making that much money. They look great now because their prices have fallen 50%.

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