Bruce Berkowitz has three funds in his Fairholme Fund. One is called the Fairholme Focused Income Fund, which includes stocks that pay high dividends to shareholders. This is the fund in which he now has all of his drug companies.
In the first quarter of 2010, Glaxosmithkline increased its dividend 7% to 65p, and since 2005 has increased it every year an average of 8%. Its dividend yield is 4.8% and its payout ratio is 71%. The company had earnings per share of $0.62, up from $0.57 in the same quarter a year ago. It reported decreased free cash flow in 2010 of $9.0 billion from $10.1 billion in 2009. By late 2011, they hope to divest non-core OTC brands and use the proceeds to fund increased returns to shareholders.
In the past four years, the company has had 4 billion pounds of sales lost due to generic competition over the last four years. To mitigate the decline, the company has decided to focus its consumer healthcare business around a portfolio of “priority” brands and the emerging markets. It also divested its shareholding in Quest Diagnostics for proceeds of $1.1 billion, as well as its interests in Zovirax cream and ointment formulations for $300 million.
GlaxosmithKline has a portfolio of about 30 opportunities in phase three and registration. Recently, it helped develop a drug that is the first new treatment for lupus in 50 years, which is pending approval in Europe. The drug could generate multi-billion-dollar sales, and GSK will split the profits with Human Genome Sciences, who co-produced the drug.
Astazeneca gives a dividend yield of 3.70% and has a payout ratio of 62.0%. In 2010 free cash flow was down to $9.9 billion compared to $10.9 billion in 2009, but was the second highest since 2006. The company lost $550 million in revenue in the first quarter 2010 due to generic competition and the impact of government price interventions. Basic earnings per share increased from $1.91 in the first quarter 2010 to $2.07 in the first quarter 2011. The company’s distributed net cash to shareholders in the first quarter increased 57%, with dividend payments of $2.7 million and net share repurchases of $1.2 million.
The FDA in April approved Astrazeneca’s drug Vandetanib for the treatment of medullary thyroid cancer. It is the only medicine approved by the FDA for patients with advanced medullary thyroid cancer. It is rumored that Astrazeneca could be considering acquiring a stateside company, Cubist Pharmaceuticals, which sells an antibiotic which treats skin infections, as well as the “superbug” MRSA. Astrazeneca already has a license to develop the antibiotic, Cubicin, in China.
Eli Lilly gives a dividend yield of 5.0% and a payout ratio of 41.0%. In 2010 Eli Lilly generated its second highest free cash flow in 10 years at $6.2 billion, and had 10-year record net income of $5 billion. Its dividend per share for 2010 was $0.49, unchanged from 2009.
Eli Lilly recently won a patent legal dispute which will allow the company to maintain its patent on its antidepressant drug Cymbalta and prohibits companies from selling generic versions. Eli Lilly’s animal health division, Elanco, recently made an offer to acquire the animal health business Janssen Pharmaceutical NV, which will confer a portfolio of about 50 marketed animal health products to the company.
Bristol-Myers Squibb has a dividend yield of 4.6% and a payout ratio of 61.0%. It reported a sales increase of 4% in 2010 over 2009. It generated 10-year-record free cash flow in 2010 of $4.1 billion, and had net income of $3.1 billion, declined from $10.6 billion in 2009. Earnings per share increased 4% in the fourth quarter. The company has paid dividends of $0.33 per share for the last two quarters.
Pfizer, which Berkowitz eliminated from his portfolio in the first quarter 2010, had a smaller dividend in the first quarter of 2011 than the drug companies Berkowitz bought into, at $0.20 per share. Its dividend yield is within the range of the other companies at 3.8%, and it has a payout ratio of 36.0%. The company has paid cash dividends for the past 289 consecutive years.
The European Commission recently approved the sale of a drug Pfizer developed in partnership with Bristol-Meyer Squibb, Eliquis, which analysts estimate could generate sales of over $1 billion annually. The drug prevents clots in joint-replacement surgery. Pfizer is in danger of losing significant income from competition from generic versions of their older drugs, such as Lipitor, and the new drug could help offset those declines. Pfizer is trying to speed the FDA’s review of its new cancer drug in another effort to replace lost Lipitor revenues. In the first quarter of 2011, the loss of exclusivity of Lipitor took out 13% in sales, and the loss of exclusivity of its Alzheimer’s treatment Aricept in November 2010 negatively affected sales as well. Overall, however, sales were up 10% in the first quarter 2011.
In a 2009 interview with Forbes, Berkowitz disclosed that he was attracted to Pfizer was because of “the fear that the new administration was going to destroy our drug companies … which sent the prices of these securities over the cliff.” He noted that the price paid versus the company’s earnings could produce a double-digit yield.
When he sold Pfizer, he told Morningstar that he didn’t like pharmaceuticals because of the recurring non-recurring expenses, and saw better propositions in collapsed financials and health insurers. He said he was always looking for companies with cheap stocks compared to the amount of cash they were generating. Berkowitz sold Pfizer when it was trading around $17 and had just generated $15.4 billion in free cash flow for 2009. In 2010 it generated $10 billion in free cash flow and is trading at about $20 per share, up about 36% over the last year.