Pharma Investments Are Starting to Pay Off

Almost four months ago, in November 2008, I suggested to get rid of risky stocks, including financials, and to load up on pharma stocks instead (see “Sell Risk, Buy Pharma,”), in part based on former Raymond Jones analyst and now hedge fund manager Michael Krensavage’s analysis of the pharma sector about a year ago. Specifically, I recommended (in alphabetical order) Forest Laboratories (FRX), Johnson & Johnson (JNJ), Merck (MRK), Noven Pharmaceuticals (NOVN), Pfizer (PFE), Schering-Plough (SGP), and Wyeth (WYE), as a portfolio to get through the choppy market.

Since then, the market at first continued to zigzag wildly throughout the end of 2008—as it had done for a while since its crashes in September and October—before it began to engage in an apparent free fall in 2009. Last week was the first time that we saw a multiple-day upward rally again, which some perceive was catalyzed by good news coming from otherwise battered Citigroup (C). On Monday night last week, CEO Vikram Pandit had sent out a staff memo where he revealed that Citi had accumulated $19 billion in revenues in January and February, having its best period since the third quarter of 2007. Whether this is the beginning of the end of the crisis on Wall Street, or whether it was just another bear rally, I find it a good time to evaluate how my recommendations have done to date.

To be specific, I wrote the above-referenced article, which published on November 25, 2008, after the market closed on November 24, and this was the latest data I had, so I will use it as the starting point. I will compare these November 24 closing prices to the closings on Friday, March 13, 2009, last week, the latest data I had while writing this article. Here is what happened during that period:

On November 24, 2008, the Dow Jones Industrial Index closed at 8443 points; last Friday, it closed at 7224. Despite the rally last week, this still constitutes a 14.4% loss compared to the November 24 value. The S&P 500 closed at 851.81 on November 24, and the NASDAQ at 1472. On Friday, the S&P was at 756.55, a 12.2% loss since November, and the NASDAQ at 1432, a small loss of 2.7%.

In comparison, the recommended pharma portfolio did not just lose less than any of these major market indices, but instead would even have created a gain of 8.7% in these less than four months of an overall down market (i.e., an annualized return of over 30%) for everyone who evenly split his investments among these seven recommended stocks, i.e., who invested the same amount of money in each of them at market close on November 24.

The star of the group was Schering-Plough, which is up 62% from its share price of $14.97 in November. A big part of this gain must be attributed to the reverse merger with Merck, which valued Schering-Plough shareholder compensation at $23.61 per share. However, Schering-Plough was already up 18.8% since November (at $17.63) the week before the merger was announced on March 9. Its share price also closed further up at $24.21 on Friday, above the shareholder compensation value announced in the merger press release. Merck, in turn, lost somewhat upon the merger news initially, dropping a little under one percent from its closing price of $22.74 on March 6 to its opening price of $20.15 on March 9, but has since recovered and more, with its closing price on Friday being $27.07, 8% up since its closing of $25.44/share on November 24.

The runner up after Schering-Plough is Wyeth, another beneficiary of a merger—this one with Pfizer. Wyeth opened up almost 10% on January 23 compared to its closing price the day before, after news about the companies’ buyout negotiations broke. Overall, Wyeth is up 24%, closing at $43.20 on Friday, as opposed to $34.73 on November 24. Pfizer’s stock was the (short-term) loser of the deal, beginning to drop soon after the news, and continuing until its share price hit a low at $11.62 on March 1 before it began to recover again. Overall, Pfizer is still down 9% at $14.54 per share versus $16.04 on November 24.

Indeed, the other three stocks in the suggested portfolio booked some losses as well: Forest Labs is down 1% between November 24 and Friday, Johnson & Johnson is down 14%, and Noven is down 9%. However, considering that three of the seven portfolio stocks, Johnson & Johnson, Merck, and Pfizer, are part of the rather small group of only 30 stocks that make up the Dow Jones Industrial Index, an overall 8.7% gain based on a portfolio including those three as opposed to a 14.4% loss of the Dow index as a whole is nothing to sneeze at.

Also important was to leave financials alone. Again, looking at Dow components, Citigroup is down 70% since November 24—despite its 80% rally last week from a share price that had briefly dipped below $1; Bank of America (BAC), which is still troubled by the Merrill Lynch takeover, is down 60% (at its low point in February, its share price was down 83% compared to November); American Express Co. (AXP) is down almost 40%; and J.P. Morgan Chase (JPM) is down 14%.

So what now? I say, stay the course. The worst may be over, but there are at least some more turbulences ahead.

References:

Matthew Herper, “Valuing Pharma Like Metal Benders,” Forbes, June 16, 2008, at 72-73.

Kiran Stacey, “Citigroup’s New-Found Optimism Sparks Recovery,” FT.com, March 11, 2009.

Francesco Guerrera, “Citi’s magic places banks back on most wanted list,” FT.com, March 10, 2009.

“Merck and Schering-Plough to Merge,” Business Wire, March 9, 2009,

Sara Stefanini, “Pfizer, Wyeth Merger May Test Obama FTC’s Mettle,” Law 360, January 23, 2009.

Sundeep Tucker, “Bank Of America Gets $138bn Lifeline,” FT.com, January 15, 2009.

Disclosure: None.

Comments

[atavist.avatar:]

Even a blind boar finds an acorn every once in a while.

Mar 16 08:56 AM

[Football Geek:]

I like the ehalth care sector, and look for it to rise in the future. Once all those baby boomers start to retire on mass, pharma products will be in demand. Long term shareowners will do well in this sector.

Mar 16 08:52 PM

[felixd:]

anyone wanting to invest in any pharma of biotech stocks ought first to think long and hard about government risk. The FDA is probably the worst federal agency in the government and has been beaten by Henry Waxman and others in Congress for so long and so hard, that they are now shell shocked and extraordinarily risk adverse. Check out the historical low levels of drug approvals for 2008...about 25% of the approval rate of just 10 years ago. Now we learn that the FDA number #2 just nominated by President Obama in non other than the former Waxman staffer that led the assualt on the FDA. You can absolutley expect them to huncker down even more and drug approvals will likely get even more difficult to obtain and more expensive. Hard to invest in new drugs discovery and bio research if it is unlikely that a company can bring a novel new drug to market.

Mar 24 04:59 PM