Morningstar Advisor - August/September 2010 - 45

to the top line for a lot of health-care firms. Today, companies are saying that emerging markets are going to be a huge growth trend. Is there potential for health-care firms 14000 in these markets?
11000

Acker: One of the most important and

least-appreciated growth areas is emerging 8000 markets. We invest there directly and indirectly. Our team was down in Brazil, 5000 for example, where we met with the management of OdontoPrev, the country’s leading dental insurer. Our thesis here is that there is an emerging middle class in these markets, so more money will be spent on health care. Dental insurance in the United States is about 70% penetrated, but in Brazil, it’s about 15%. OdontoPrev has more than three times the market share of its next largest competitor. We can also indirectly invest through large, multinational companies that have a strong presence in emerging markets. For example, five years ago, I don’t think China was among the top 20 global pharmaceutical markets. Today, it’s number five. In five years, it’ll be number two. Companies such as GlaxoSmithKline GSK have 25% of their business in emerging markets through pharmaceuticals, consumer products, and vaccines. We think that market will continue to grow double digits, and Glaxo’s trading at less than 9 times next year’s earnings. We don’t think that kind of growth is captured in these stock prices.
Jenner: Life expectancy in emerging markets

at home, because there is substantial reward, but there is substantial risk. To put it simply, this is an away game. That means that the refereeing, the home fans, everything has the potential to be against you. That doesn’t mean you can’t win, but I would leave it to people who frequently get down to Brazil, get to China, and get to India. Even then, for people like Andy and myself, we’re not going to get it correct all the time. But emerging markets is a very important theme.

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The Case for Generics
Question from audience: I’m surprised that you haven’t talked about generic drugmakers because this is an area that will introduce some savings into the system. What are your feelings about Teva TEVA or other companies that we might not know about? Jenner: We own Teva. You’re right thematical-

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will increase. People won’t die of infectious diseases and parasitic diseases. They are going to start to die of things that have the morbidity and mortality that we have in the Western world, and they will devote more of their gross domestic product to health care. When you’re going to these emerging markets, what you’re really seeing is green-field opportunities. Now, what we’re talking about may look easy to do on TV, but don’t try this

ly—generics do provide a cost benefit. The issue that you have to think about is these across-the-board price cuts. Whatever you’re getting today, a single payer—i.e., the European government—just said that you’re going to get 10% less tomorrow. Those types of price cuts are really hard to outrun. The other thing is that while I think Teva offers good value, remember that its market cap is $40 billion. If Teva is going to double in the next five years, it’s got to add $40 billion in value for your stock, and that is a mouthful. It would be easier to find a company that’s $2 billion to $3 billion in cap. If it were to double, it would have to add only $2 billion to $3 billion incrementally. Teva is a fine company. It’s had a marvelous track record. At $52 or $53, the stock is a very good value, but is it going to be a company that is going to double in the next five years? If it is, we need to find a path for it to find $40 billion of incremental value, and I’m a little skeptical about that.
Acker: We also own Teva and another one

over the next five years. Basically, China put together a mini-Teva. China followed Teva’s strategy of being a global generics company, so they have a strong presence in the Jan-05 United Jan-06 and Europe. Generic penetration States Jan-10 Jan-09 Jan-08 Jan-07 around the world is much lower than it is Feb-05Aug-05Feb-06Aug-06Feb-07Aug-07Feb-08Aug-08Feb-09Aug-09Feb-10 Mar-05Sep-05Mar-06Sep-06Mar-07Sep-07Mar-08Sep-08Mar-09Sep-09Mar-10 Apr-05Oct-05Apr-06Oct-06Apr-07Oct-07Apr-08Oct-08Apr-09Oct-09Apr-10 May-05Nov-05May-06Nov-06May-07Nov-07May-08Nov-08May-09Nov-09May-10 Jun-05Dec-05Jun-06Dec-06Jun-07Dec-07Jun-08Dec-08Jun-09Dec-09Jun-10 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 in the United States, where it’s 70%. In many foreign markets, it’s still at 20%.
Jenner: To your point, Japan’s generic

penetration rate is 10% to 15%. The government recognizes that generics is part of the solution to the cost issue. There’s no reason why Japan’s generics market, 10 years down the road, can’t look more like that of the United States. The two firms we’re most excited about are Sawai and Towa; both are Japan-domiciled. K
Damien Conover, CFA, is Morningstar’s pharmaceuticals equities strategist and editor of Morningstar Healthcare Observer.

that’s interesting, Mylan MYL, which doesn’t have to add $40 billion market cap to double

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Morningstar Advisor - August/September 2010

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