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Prescription for the Best Investment
Posted by: victorselva (IP Logged)
Date: October 11, 2013 05:20PM

Despite patent expirations and regulatory pressures, the pharmaceuticals industry plays a major role in the U.S., with both the consumption and the production of its products. The promising outlook for the industry is projected according to forecasts made by IMS Health, where the dollar value of the global drug market is projected to grow at a compound annual growth rate of 3% to 6% between 2012 and 2016. The S&P Pharmaceuticals Index increased 21.86% year to date. So let's take a look at two companies in this sector and see which one is doing better and thus stands as the best investment.

Pfizer Inc. (PFE) is a biopharmaceutical company that discovers, develops, manufactures and sells medicines for people and animals worldwide. With significant competitive advantages in developing new drugs through a heavy investment in research and a broad portfolio of patent-protected drugs, the company has the largest economy of scale in the pharmaceutical industry.

Internal Restructuring

In July 2013, Pfizer announced plans to internally separate into three segments (innovative units and value business). One innovative unit will comprise drugs with patent exclusivities beyond 2015. The other innovative unit will include vaccines, oncology agents and consumer healthcare. The third segment is a value unit that will consist of mature drugs. This new structure will provide transparency for investors because financials will be divided for each of these three business segments. The changes will start in Jan. 2014 for various other countries.

Merger and other agreements

In October 2009, Pfizer acquired rival drug maker Wyeth for about $68 billion. With the acquisition the company becomes more diversified as well as gaining exposure in the biologic industry with meningitis vaccine Prevnar and rheumatoid arthritis drug Enbrel. Moreover, the merger helps to gain market in vaccines and new pharmaceutical markets. The business creates a lower and more flexible cost base and a stronger presence in emerging markets. The company´s focus is the development of treatments in the fields of oncology, cardiology, metabolic disorders, neuroscience, immunology, inflammation and vaccines. The merger is aligned with this path, because Wyeth has some products and research in those fields.

The company also entered into a strategic deal with Merck in 2013 for the development and commercialization of ertugliflozin (diabetes). Other agreements include the marketing agreement with Protalix for its Gaucher treatment (Elelyso) and the development and commercialization of Eliquis with Bristol-Myers Squibb.

Better Outlook

Johnson & Johnson (JNJ) is the world's largest and most diverse health-care company. The business is divided in three divisions: Consumer, Pharmaceutical, and Medical Devices & Diagnostics. In 2012, these segments contributed 21.5%, 37.7% and 40.8% respectively to the company´s revenue. Is a leader across the major health-care industries and faces relatively modest patent losses during the next years. The company sales in 2012 totaled $25.4 billion, up 4% compared to the previous year. Key drivers of the pharmaceutical division include leading drugs, such as immunology drug Remicade.

The best seller

Remicade contributed almost a quarter to pharmaceutical revenues, the drug generated $6.1 billion sales in 2012. The growth is driven by strong demand in the rheumatoid arthritis market. Other pharmaceutical products are Procrit/Eprex ($1.5 billion), Velcade ($1.5 billion), Risperdal Consta ($1.4 billion), Prezista ($1.4 billion) and Concerta ($1.1 billion). In addition, drugs like Simponi and Stelara also hold promise to the next years.

R&D and Emerging Markets

Internal growth is a key objective and as a matter of facts efforts are being made to develop next-generation products. The R&D spending in 2012 totaled $7.7 billion, representing 11.4% of sales. R&D centers were established in Brazil, China and India, countries that are improving insurance coverage so as to reach more people. The company also intends to continue working on strengthening its pipeline in Japan as well as China. Finally, the company has also been making strategic acquisitions. Examples include Synthes, Cougar Biotechnology and privately-held company Aragon.

In terms of valuation, the next table shows two of the most used multiples:

Company Trailing P/E Compared to Industry P/E Mean (=25) Forward P/E
Pfizer 8.1 Discount 12.51
Johnson & Johnson 19.9 Discount 15.34


Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: The return on equity.

Company ROE ComparedtoIndustry Mean (=5.5)
Pfizer 17.9 Above
Johnson & Johnson 16.7 Above


It is very important to understand this metric before investing in a high-growing company.

Final Comment

Although the sector continues to face pressure from patent expirations on many drugs, both companies are developing strategies to help expand revenues. The internal restructuring of Pfizer in three divisions and several agreements could offer good potential for the company in the coming years. On the other hand, Johnson & Johnson is looking to increase its presence in emerging markets, and thus allocating big R&D budgets for them. Considering the impact that these drivers will have on future results, I think that Johnson & Johnson will have a higher performance than its competitor.

Hedge fund guru´s like Paul Tudor Jones, Steven Cohen and Donald Yacktman added this stock to their portfolios, and I would advise fundamental investors should consider adding this stock to their portfolios as it seems to be an attractive option for investors in the near future.

Disclosure: Victor Selva holds no position in any stocks mentioned.



Guru Discussed: Donald Yacktman: Current Portfolio, Stock Picks
Paul Tudor Jones: Current Portfolio, Stock Picks
Stocks Discussed: PFE, JNJ,
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