As Congress wrestles with the various healthcare reform proposals under consideration, Kris Jenner, manager of the T. Rowe Price Health Sciences fund, is faced with just as difficult a task: How to make prudent investments in healthcare that can weather the seismic changes in the offing.

"It's really quite hard right now to construct a portfolio that is bullet proof to any type of policy," he says. "There are just so many versions of proposals in the various committees and subcommittees."

Several issues are still up in the air. Among the most controversial is a public insurance plan that would compete head-on with private insurers. Would that be a negative for private insurers like WellPoint, a top holding in the fund, or is there a way that these types of businesses can thrive under such a change?

Also under consideration is giving this hypothetical government insurer, as well as Medicare, the power to negotiate more favorable pricing on prescription drugs with the myriad pharmaceutical companies that reside in the portfolio. Will drug companies' profits decline or will more volume make up for the inevitable price decreases?

Jenner is uniquely suited to navigate this changing landscape, having been in the industry as both a practitioner and an investor. A former surgical resident at Johns Hopkins University, Jenner later gave up medicine to focus on stocks in 1996 when he went to work for T. Rowe Price as an analyst in 1997. He did well enough to snag the portfolio manager title at Health Sciences in 2000. Under the doctor's care, the fund is up an annualized 7.5% for the last 10 years through July 14, besting 77% of the specialty health funds tracked by Morningstar. In the last five years it's up 3.9%, in the category's top 11%.

LIKELY WINNERS

Despite the uncertainty, Jenner says, a manager can have some measure of confidence about what types of businesses will be in favor no matter what new systems emerge.

First are companies with groundbreaking cures for as-yet-untreated diseases. "I do think that as a society we will continue to pay for innovative therapies or processes," Jenner says.

Take, for example, Alexion, a drug maker that specializes in therapies for hematological diseases, autoimmune disorders and some cancers. The company makes Soliris, a blockbuster treatment for paroxysmal nocturnal hemoglobinuria, a disorder that destroys red blood cells and causes anemia, fatigue and blood clots in its sufferers. Most people with the disease die within 15 years of diagnosis. "Soliris is the only product available for this rare disease," Jenner says. Alexion sold $81 million of the drug last year, more than double the amount it sold the year before, accounting for more than a quarter of the firm's total revenues. Shares of Alexion are up 7.6% in 2009.

The next most likely beneficiaries are those firms that can demonstrate cost savings for the healthcare system, whether they provide new information technologies that help avoid duplication or preventive therapies that can keep patients away from pricey procedures. The most important members of this category are generic drug companies. "Under virtually any scenario, the generic industry will be better off in the future," Jenner says.

For that reason, the fund's largest position is Teva Pharmaceutical Industries, the Israeli generics powerhouse. Teva dominates the generic drug business through several interesting strategies. The firm plans to offer generic biologics, the next frontier for generics. Biologics are seen as difficult to manufacture and biotech firms therefore argue that it's hard to show that copycat versions are as effective. There are no regulatory means of gaining approval for these drugs yet.

But Teva is gearing up for the day when approval comes through on its buyout of CoGenesys, a biotech outfit, last year. And for now it's set its sights on Europe, where a regulatory pathway for the generic biologics is starting to take shape.

Next, Teva manufactures about half of its own active ingredients so that it can capture markups on raw material costs. (Ordinarily, suppliers-not manufacturers-would pocket those profits.) And Teva's pending acquisition of No. 4 generic maker Barr Pharmaceuticals gives the firm a stronger presence in North America and Europe, and even greater heft in a business that's seen as commoditized. Teva is up 16.8% since the beginning of the year.

MORE COST SAVINGS

Similarly, two pharmacy benefit managers, Express Scripts and Medco Health Solutions, help insurers keep a lid on their prescription drug costs by funneling participants into mail- order pharmacies, where drug prices are heavily negotiated and generics dominate. "To the extent that they can keep costs down, they share in the savings with their customers," Jenner says. Express Scripts is up 18.8% this year, while Medco is up 13.4%.