Portfolio Manager Perspectives

Jeff Benjamin

Biotech ‘incredibly compelling,' says Goldman's Gallagher

Sector has high barriers to entry and durable models, says mid-cap fund manager; also sees lots of M&A ahead

Sep 7, 2010 @ 12:01 am

By Jeff Benjamin

The market is poised for a wave of mergers and acquisitions, according to Sean Gallagher, co-manager of the $6 billion Goldman Sachs Mid Cap Value Fund Ticker:(GCMAX).

Mr. Gallagher, who helps manage a total of $10 billion in the bottom-up strategy, said as the economy improves lots of companies will become attractive acquisition targets.

“This is an opportune time for the M&A theme,” he said. “But the macro backdrop has to be a little better for [corporate executives] to start re-levering their balance sheets.”

He added that fear and uncertainty about the overall economy are still holding back some consolidation activity.

“Right now cash balances are at 30-year highs,” he said. “We think as CEOs start to find some confidence, M&A will be a nice catalyst for the next 12-to-18 months.”

The portfolio of about 100 stocks, is summed up as “price and prospects,” meaning the management team is looking for value with some kind of catalyst.

While he doesn't make sector bets, Mr. Gallagher said he is finding some opportunities in the biotechnology space because the overall market has brought down the sector along with most healthcare-related stocks.

“Biotech is trading in line with pharmaceutical stocks, and I think the whole market has compressed,” he said. “Biotech is incredibly compelling.”

Biogen Idec Inc. Ticker:(BIIB) is an example of a company that is trading at 10 times earnings (according to Mr. Gallagher's analysis) and is generating lots of free cash flow.

“Unlike pharmaceutical companies, biotech companies face very little competition, because it's difficult for the generics to come in and replicate what they're doing,” he said. “With the higher barriers to entry and very durable models, biotech should be trading at a premium to pharmaceuticals.”

Property and casualty insurance company W.R. Berkley Corp. Ticker:(WRB) is another name Mr. Gallagher likes right now.

“This is a diversified underwriter with a diversified book of business and return on equity in the mid teens,” he said.

The company also recently announced a stock buyback plan for 5% of the outstanding shares.

Through yesterday, the fund gained 3% from the start of the year.

The S&P 500 Index, over the same period, was down 2.2%.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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