Value Investors' Favorite Drug Companies

Missed earnings expectations for second-quarter prompted price drops for most

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Holly LaFon
Aug 29, 2017
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All portfolios of gurus tracked by GuruFocus for the second quarter have been turned in, enabling the S&P 500 screener to sift out the drug company stocks that they bought the most.

Drug manufacturers outside of the S&P 500 have become one of the more expensive sectors in the market. They have one of the highest P/E ratios with a median of 26.9. Most of the stocks besting the sector are other segments within health care, such as medical devices with a median P/E of 30.7, medical diagnostics and research with a median P/E of 36.8 and biotechnology with a median P/E of 30.7. Only online media has a pricier P/E outside of the healthcare market at 33.2.

Teva Pharmaceuticals (

TEVA, Financial) was the stock the most tracked investors purchased. Five of them purchased shares. Vanguard Health Care Fund (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss have the largest positions.

Teva, which makes almost 600 generic medicines, saw its stock price fall 55% year to date, which included a plunge in early August on disappointing earnings. Its price at Fridays market close was $16.21 per share.

In the second quarter, Teva suffered from deterioration in its U.S. generics business due to price erosion, increased customer consolidation prompting lower volume and increased competition resulting from rising FDA generic approvals. It also experienced delayed or increasingly competitive markets for product launches.

"Given the current environment, Dr. Yitzhak Peterburg, interim president and CEO, said in a second-quarter statement, we have had to take swift and decisive actions. We are focused on executing meaningful cost reductions, rationalizing our assets and maximizing their value, actively pursuing divestiture opportunities and strengthening our balance sheet. We will continue to take action to aggressively confront our challenges."

Nonetheless, Tevas revenue grew 13% year over year mainly because it bought Actavis generics business in a deal that closed Aug. 2, 2016. Its operating loss deepened to $5.7 billion compared to $0.4 billion in the same period last year. In addition, it swung to a net loss of $6.0 billion or $5.94 per share, from net income of $188 million or 20 cents per share.

In its non-GAAP outlook for 2017, Teva lowered its guidance to between $22.8 billion and $23.2 billion, from its former range of $23.8 million to $24.5 billion. Non-GAAP earnings per share for the year is expected to fall within a range of $4.30 to $4.50.

Several factors contributed to the lowered outlook: accelerated price erosion in its U.S. generics business and delays in generic launches in the U.S. It also expects weakness in Venezuela due to political and economic tensions.

Four investors purchased GlaxoSmithKline in the second quarter.

Ken Fisher (Trades, Portfolio) has taken the largest position at 0.51% of its outstanding shares.

GlaxoSmithKline (

GSK, Financial) is a U.K.-based health care company with a $95.6 billion market cap that focuses on pharmaceuticals, vaccines and consumer healthcare. The company has had deteriorating results in several areas of its finances. The revenue per share has declined since 2013 to $14.19 from $17.67. EPS declined to 46 cents in 2016, the lowest in 15 years. 2016 also saw 15-year lows for return on equity, return on assets and net margins.

GlaxoSmithKlines share price sank in late July and August after it lowered 2017 guidance for EPS to 3-5% from 5-7% it set in the first quarter as it paid to speed the review of its two new HIV drug regimens.

For the period from 2016 to 2020, the company expects EPS growth in the mid-to-high single digits percentage CAGR with the anticipation of one or several generic versions of its drug Advair to launching in the U.S. prior to 2020.

For the second quarter, the company grew sales 12% for pharmaceuticals, 16% vaccines and 10% for consumer healthcare. Loss per share declined to 3.7 pence from 9 pence year over year.

Eagle Pharmaceuticals Inc. (

EGRX, Financial) attracted four buyers in the second quarter, with two of them new: Steven Cohen (Trades, Portfolio) and Ken Heebner (Trades, Portfolio). Joel Greenblatt (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) both increased their positions. The largest holder, First Eagle Investment (Trades, Portfolio), holds 4.29% of outstanding shares and subtracted 1.4% of them.

Eagle Phamaceuticals is a $856.3 million company that specializes on intravenous treatments primarily for critical care, orphan diseases and oncology.

Eagle Pharmaceuticals shares tumbled 25% year to date, replicating a steep drop in July on second-quarter financial results. Despite 22% year-over-year revenue growth, the market frowned on Eagles earnings miss. EPS arrived at 28 cents, below analysts forecast of 51 cents.

Sales of each of its four of its five biggest products also increased, while sales of diclofenac-misoprostol declined by $0.1 million.

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I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.