By Naomi Kresge

April 8 (Bloomberg) — Sphera Global Healthcare Fund, an Israeli hedge fund that’s beaten the market since its founding in 2007, is avoiding shares of local generic-drug maker Teva Pharmaceutical Industries Ltd., which has given investors a 105 percent return over the past five years.

Instead, Sphera is building a stake in Teva’s arch-rival Pfizer Inc., the world’s biggest pharmaceutical company, which has lost 20 percent in that time including dividends. New York- based Pfizer, selling for 7.4 times estimated earnings, is the least expensive of the 10 largest drugmakers. Teva, at 12.6 times profit, is the most expensive.

“As long as something is cheap, we’ll hold it,” said Ori Hershkovitz, 36, who’s a partner in the Tel Aviv-based fund and the head of research, in an interview last month. “As long as something is expensive, we’ll short it.”

That contrarian strategy has paid off. The $120 million fund returned 17 percent since inception in March 2007, compared with a loss of 0.4 percent for a Standard & Poor’s index of global health-care stocks. Now, Hershkovitz and says Pfizer shares are attractive because of its diversified product portfolio, presence in fast-growing emerging markets and 4.2 percent dividend yield. The New York-based company probably will get positive clinical trial results by September for the tanezumab pain treatment, he said.

Not only is Pfizer a good value now, “but also we have a short-term catalyst,” he said. The fund increased its Pfizer holding this year. The company accounts for 15 percent of Sphera Global Healthcare’s assets, up from 12 percent previously, even as growth for makers of lower-priced generic medicine outpaces that of branded drug companies.

Pfizer’s Forecast

Pfizer shares declined more than warranted because its 2012 forecast in February disappointed investors and because of setbacks with cancer drug Sutent and Alzheimer’s drug Dimebon, he said. Pfizer is “poorly regarded by the market,” said Hershkovitz.

Started with capital from Mori Arkin, the Israeli entrepreneur who led Agis Industries Ltd. until its 2005 takeover by Perrigo Co., the Sphera health fund began accepting external investors in March 2007. The fund taps a network of Israeli doctors for opinions on new drugs and hired a veteran Teva patent lawyer to analyze prospects for generic challengers, said Hershkovitz, who joined at the fund’s inception after working as an analyst for Leader & Co. Investment House Ltd.

Arkin, Hershkovitz and two other partners seek companies whose shares are temporarily depressed by bad news, or whose stock may benefit from catalysts such as drug approvals within two years.

Generic Growth

Sphera Global Healthcare is avoiding Teva, the world’s biggest generic-drug company, even as growth of lower-priced copied medicines outpaces that of branded pharmaceuticals. Pfizer is preparing to lose most of the $11.4 billion in 2009 sales for Lipitor, the top-selling medicine, starting next year when cheaper copies enter the market from companies such as Teva.

Teva, based in the Tel Aviv suburb of Petah Tikva, was the fund’s biggest holding when it started four years ago, and comprised as much as 15 percent of its holdings until Sphera sold the shares in 2008. The drugmaker in January told investors it’s aiming to more than double sales to $31 billion by 2015, and last month agreed to buy Germany’s Ratiopharm GmbH, snatching it away from Pfizer in an auction.

While Sphera missed out on Teva’s last rally, the company’s American depositary receipts probably won’t budge much from about $65 in the next several months, said Hershkovitz. Teva has advanced 41 percent in the past year to close yesterday at $63.51 on the Nasdaq Stock Market.

“Looking back I think of course we could have done it differently,” the fund manager said. “Right now, if you look long term, you can find opportunities that are 20 percent to 30 percent cheaper.”

Sanofi Slump

Sanofi-Aventis SA is one of them, he said. The fund added to its stake in the Paris-based company this year as the shares slumped on the prospect of a generic competitor in the U.S. to Sanofi’s Lovenox anti-clotting drug, he said. Sanofi fell from a 52-week high of 58.90 euros on Jan. 20 to as low as 51.68 euros two weeks later after Novartis AG said Jan. 22 it planned to sell a version of the drug as soon as it obtains U.S. Food and Drug Administration approval.

The sell-off wiped 9.52 billion euros ($12.7 billion) off Sanofi’s market capitalization, more than Lovenox contributes in earnings, he said. “The stock grossly overreacted,” said Hershkovitz. Sanofi now sells for 8.5 times this year’s estimated earnings, compared with an average price-earnings ratio of 11 for the 10 largest drugmakers.

Sphera added to its stake in Pfizer and Sanofi this year after selling U.S. drugmaker Merck & Co. when shares peaked above $40 in January, Hershkovitz said.

Twelve percent of the fund is in Basel, Switzerland-based Novartis, which Sphera regards as the “best-managed company in our universe,” said Hershkovitz. Ten percent is invested in Novartis’s cross-town competitor Roche Holding AG, which he said has the best science.

California-based biotechnology companies Onyx Pharmaceuticals Inc. and NeurogesX Inc. account for about 9 percent of the fund. Onyx is working with Germany’s Bayer AG on the tumor-fighting drug Nexavar, while NeurogesX is developing a pain-treating patch. The fund views both companies as takeover targets, Hershkovitz said.

To contact the reporter on this story: Naomi Kresge in Zurich at

Last Updated: April 7, 2010 18:11 EDT