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4 Winning Big Pharma Buy Ideas

March 09, 2012 | About:
I believe over the next 10 years, a drug company's pipeline and portfolio will be key to future success. In this article, I analyze 4 large cap pharmaceutical companies that have what it takes to generate alpha over the long term. However, in the short terms, many of these stocks have been called "dead money." That's why I am recommending only stocks with significant dividends to pay out income while you wait. Please use my research as a starting point for your own due dilgence.

Pfizer (PFE) Shares are currently yielding 4.2%. After a sudden drop in August 2011, the stock has been on an upward trend until now. The financials of the company are strong, with $69 billion in sales and $11.5 billion in cash flow. The company, given its size, has no real competition. It reached around $67 billion sales in 2011. The greatest risk remains the loss of the patent for Lipitor. Despite this, the company is still attractive to investors because of a very strong portfolio. Among other compounds, Prevnar looks promising as a potential treatment for Alzheimer's disease. The FDA has also just accepted a new drug application for Tafamidis. Pfizer's strength is definitely its R&D portfolio. Its strategy has relied on aggressive acquisitions, with the latest one being Wyeth. The giant continues to pursue strong collaborations at the same time. I believe these developments could push the stock upward in the coming quarters. I recommend buying this stock because of the company's bright prospects and overall outlook including the high dividend yield.

Sanofi (SNY) After a big peak between April and August of 2011, the stock went down, and is currently recovering to reach present levels. Shares are currently yielding 4.7%. The company is one of the biggest players in the industry and some predict that it could beat out Pfizer as number one. Sanofi's acquisition of Genzyme for $20 billion has been a big success for product development. Aside from biotech with smaller acquisitions like Bipar in the San Francisco Bay area, Sanofi has strongly invested in emerging markets like India. The company suffered patent expirations but could at least partly offset them through the development of a growth platform and strong willingness to keep earnings per share as steady as possible, as shown in the publication of the 2011 results. Sanofi continues its streamlining efforts, which have so far been successful. According to a recent announcement, the company still trims its sales force and reorganizes research by hub. This helped Sanofi meet its cost reduction target in 2011. This huge turnaround of the company was made possible by the arrival of CEO Viehbacher a couple of years ago, and gives me confidence in the company's high potential to deliver on or beyond target. I recommend buying Sanofi, primarily due to the company's high dividend yield and solid growth prospects.

Johnson and Johnson (JNJ) After a steep rise in March 2011, the stock has been relatively stable. The shares currently yield 3.5%. The company is currently acquiring Synthes to boost its orthopedics and neuro business. It also supports innovative therapeutic solutions in the pain drugs arena. It recently had a setback: the withdrawal of its hip PMA. The company suffered a lot of product recalls and issues particularly in its consumer health division: 57,000 bottles of its epilepsy drug were withdrawn in April 2011, and toxic chemicals were found in some of its baby shampoo products. The company's financials are strong, however, with close to $62 billion in revenue (almost flat compared to 2010), and close to 80% gross margin in 2011. Looking back, cash flow reached $16 billion in 2011, up from around $15 billion in 2010.

The firm's major competitors are Abbott, Covidien and Novartis. Like J&J, those companies are diversified and not only operating in pharma but also have a large consumer healthcare segment and/or diagnostics division. Still, J&J remains a leader in terms of financial results: $62 billion versus $59 billion in revenue for Novartis, and the highest financial ratios in its sector. On the pharmaceutical side, J&J just opened a brand new biotech center in San Diego to be at the top of the latest research in this arena. This shows that the company is committed to strengthening its pipeline while remaining highly profitable in selling consumer healthcare products. I recommend buying this stock now, as it has shown relative stability recently, and the stock price will likely rise as new product introductions or collaborations surface in the pharmaceutical/biotech area and the dividend yield is maintained.

Novartis (NVS) Shares are currently yielding 2.8%. The company is currently suffering from a patent loss for Diovan, and announced that it will cut 2,000 US jobs. This will equate to a $900 million charge to offset the loss. The company also put a warning label on its Rasilez blood pressure drug. In consumer healthcare, it had to recall Excedrin and Nodoz packages because of a potential mix up with powerful pain killers. On a good note, Novartis signed a collaboration agreement for an exclusive license to market an anti-erectile dysfunction drug from Apricus Biosciences in Europe. From a financial standpoint the companydelivered strong 2011 results, which can make investors confident in the firm's future. Novartis comes second in revenue after Pfizer with $59 billion in 2011. It still needs to work on improving its financial ratios and gross margin compared to its major competitors, Merck, Pfizer and Sanofi. To me, the company looks solid because of its potential in R&D and its excellent management by Dan Vasella and its new CEO since early 2010, Joe Jimenez. For these reasons, I recommend buying this stock.

About the author:

Dividend King
I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.

I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.

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