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I was asked earlier last week by Jungleguy, over on CB Forums in my Value II thread, about my opinion on BVF and why I do not and have not held the fund in my healthcare portfolio. We discussed that Francis Chou, the respected deep-value investor, currently holds a 9% weighting in his Chou RRSP fund.

In summary, I have four main investing strategies that I utilize across four portfolios with their respective weightings overall:
– (15%) RSP: where I use an indexing strategy using TD E-funds complimented by actively managed funds I feel offer stability and added value
– (25%) Dividend Growth: my early retirement fund using a dividend growth strategy based on criteria for evaluating current & prospective stocks that pay out consistent rising dividends. (RSP + DivG are considered one portfolio from an asset allocations standpoint)
– (25%) Health: portfolio I initiated in July 2006 to invest in stocks & opportunities from personal & acquired knowledge from my field of expertise (Nursing).
– (35%) Value: portfolio I initiated in May 2006 applying my long established & developed value rules.

As I’ve outlined in previous posts, Building an Investment Portfolio, each portfolio has been generated and maintained with very specific objectives. The tactics and strategies used may at times overlap slightly, but each is distinctively different from the rest. This is because of the inherent behaviour of a specific industry/sector, investment vehicle or discipline I practice.

Although my complete list of Value Rules is a closely held gem of mine, I don’t mind sharing pieces from time to time or sharing the similar rules I’ve established for investing into my Health Portfolio. Many investors will slam healthcare as a dead-zone with little apparent success, but I strongly urge those reading this post to look back to my previous post on Healthcare Mutual Funds (May 25) for an explanation of my reasoning.

BVF (Biovail) for many investors appears attractive solely from the perspective of its now current dividend of 8.0%. With the CDN Dividend Tax Credit, it’s a tough temptation to resist if you’re in a favourable tax bracket or looking for additional income. But the dividend is new, has no history of consistent growth and the fundamentals of the company I’ll question with some concern.

The highlights that I’ve found in previous research on the company are:
– Wellbutrin, Ativan, Diltiazem/hybrids, Vasotec, & Ventolin are all mature products providing revenue.
– Drug delivery product line & technology has great potential to offer attractive results looking forward if developed to production & adaptation.
– Decent ratios: current, quick & receivables turnover

Reasons I don’t currently hold the company or would consider it for an investment:

Price/CF: for any healthcare stock I like the Price/CF ratio in the 12-18x range. BVF’s is currently at 5.6x (7x before 20% pullback), which usually indicates to me among this sector that investors are not completely confident in both the stability of the cashflow for the company or the stock is severely undervalued. From experience, I’ve found that the market tends to pay a premium for the amount of sustainable and growing sales that a company generates and the cashflow that comes with that.

Products: BVF is still in the developing phase of its mature product line. Through acquisitions as a main strategy, the company has secured products to generate cashflow for other operations. This is much different than organic growth through R&D activities where a company may excel on the R&D platform for pushing new products. When you have an unstable mature product line, it limits your ability for future growth because there’s no stable base of revenue (CF) to help finance expensive new R&D initiatives. This issue is not new for BVF and likely not to be amended in the near future (Patent issues being the largest concern).

Management: anyone following my blog for some time will realize the premium I place on quality management. My honest opinion is that you can never over-evaluate this crucial component in assessing a company. If its not #1 on your list of priorities to assess, then I strongly urge you to consider it in the top 3 – it’s THAT important. There have been so many changes, promises and initiatives through their management that any new strategy I look to with concern. I’m not confident in their current strategy for the company from a strategic standpoint, so I’ll wait to see how well it’s executed moving forward (recent news puts this more into doubt for me).

Inventory: I look to the inventory turnover ratio for any company that offers a product with an expiry date. This ratio matters firstly because of the ability for the company to eliminate seasonality of its product line and show sustainable demand for the product. Second, it allows greater quality control since inventory of products is accessed more frequently. This is very important with drugs if any specific drug has a shelf life, volatile nature or requires special conditions to maintain therapeutic effect. This can have a massive impact on the quality healthcare institutions such as hospitals, physicians or clinics perceive and effect purchasing habits of that drug if there are other competitive products from other manufacturers. My average inventory turnover ratio for my portfolio as a whole ranges between 2.8-4.5. BVF has stated in their last annual report that their ratio is 2.0.

R&D: As I mentioned before, the product line for the company has largely been acquired through acquisition rather than developed internally. This puts into question how much success I feel the company will have moving forward on developing new products. A company with a long & respected track record of R&D success is a company that frequently trades at a premium to its peers. BVF also relies heavily on outside collaboration/alliances with other R&D centres for projects. Experience has taught me that not having all of these activities in-house can provide limitations over control, quality & rights from a legal standpoint. With the scrutiny that the FDA examines all new drugs with, quality control becomes extremely important in this industry.

Speculation: I don’t participate in this sector of healthcare because of the inherent dangers in doing so. Unless you’re privy to inside information, the likelihood of success is as good as gambling with a speculative stock. You might get lucky, but you’re just as likely to be disappointed by errors in reporting or clinical trial disappointments. I focus more on fundamentals & established products than I do on speculative plays.

Few key points:

– Wellbutrin XL (antidepressant) consisted of 42% of total revenue for the company in 2006. The patent on this drug is set to expire this year (2007) leaving it exposed to generic versions of the drug. There’s been little guidance from the company or analysts to anticipate what % of sales may be lost to generic products
– Multiple products in development, yet the approval process is still ongoing
– Personally not interested in holding the company within my portfolio until the issues I’ve raised are addressed
– I hold no financial interest/benefit from my opinion on this stock
– Francis Chou is a respected value investor that I’ve looked up to for quite some time. His access to information is much more extensive than mine, so I acknowledge that there may be value well beyond my analysis. He’ll likely prove me wrong – but we each need to do “what we do best” in terms of investing.

{ 4 comments… add one }
  • FourPillars July 24, 2007, 12:16 pm

    I think you should do some research before making up your mind 🙂

    Just kidding – you obviously spent a lot of time looking at this stock.

    A bit off topic but do you compare your actively managed portfolios to an index? I’m assuming there are equivalent indexes available which there might not be.


  • Nurse B, 911 July 24, 2007, 1:01 pm


    I’m sure there are things I’ve missed or overlooked – I’m not a professional, its more just a passion of mine :). I could take more time to look into other factors, but the main fundamentals I attribute value to I’ve listed as significant enough that I don’t find the company attractive.

    My RSP I actually index against a fully indexed portfolio of funds & ETF’s that I’ve constructed for that purpose. My plan over the next few years is to compare returns to see if the actively managed funds are adding any stability or added value.

    The DivG, Health & Value portfolio’s I don’t benchmark since I’m picking them based on solid criteria I’ve developed that the other indexes aren’t. I could apply a standard benchmark, but then its tough to figure out how fair the comparison is.

  • moneygardener July 24, 2007, 7:36 pm

    Thanks for the link Brad! I’ve added you to my blogroll as well.

  • Nurse B, 911 July 24, 2007, 10:14 pm

    No problems; building a community of individuals with similar interests, opinions & different skills only helps to benefit us all.

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