Dodge & Cox back pharma as medicare threat fails to materialise

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Pharmaceutical companies still look to be undervalued as firms with the finances and the expertise remain limited in a market that is increasingly turning towards emerging market consumption, according to Dodge & Cox portfolio managers Diana Strandberg and Steven Voorhis.

The $38 billion Dodge & Cox International Stock fund, co-managed by Strandberg and Voorhis in a team of seven managers which also manage the Dodge & Cox Worldwide Global Stock EUR fund, currently shares an overweight position in the healthcare sector despite wider investor concern this year around the ability of companies to retain profitability.

The sector, faced with patent expirations, declining sales, and waning profits, saw increased warnings by some critics this year that defensive stocks such as large cap pharmas face 'bubble-like' characteristics. Yet the team continues to invest in large cap pharmaceutical companies on the basis that valuations are still cheap and offer limited downside risk.

'These companies have outperformed in 2011 and year to date in 2012 and we remain optimistic on their long term prospects,' Strandberg said in a webcast, adding that the effects of austerity measures in Europe and the US healthcare reform have had less effect than expected this year due to firms cutting costs.

The International Stock fund had a 6% overweight in the healthcare sector at the end of September 2012. French firm Sanofi, German pharma firm Bayer AG and UK firm GlaxoSmithKline PLC alone make just under 10% of the fund.

These large caps, mostly European and US based firms, that currently see 20% of sales go to emerging economies, will benefit from a market that only sees a few companies with both the cash  and know-how to meet demand, according to Voorhis.

'There are only about a dozen pharmaceutical companies who are the only organisations with the skills and the finances to develop the drugs and get them approved by the regulator and them market them to consumers around the world,' said Voorhis.

The Dodge & Cox Worldwide Global Stock fund returned 15% in the last three years. Its benchmark, the MSCI EAFE NR USD index role 9% in the same period.