Healthcare stocks are considered to be defensive stocks, and along with consumption stocks, are the best bet during these uncertain times. Although these companies are facing revenue erosion due to expiration of patents for some of their blockbuster drugs, many of the pharmaceuticals companies are evolving their business strategy to focus on more niche diseases, tie-up with generics players to market the generics of big drugs and also trying to launch more big ticket drugs. For investors approaching their golden years, we think these 5 stocks offer safety and yield:
AstraZeneca Plc (AZN) – AZN is the world’s 7th largest pharmaceutical company based out of London, UK. It is a leading player in cardiovascular, gastrointestinal, cancer, pain management and CNS. It derives 23% of its revenues from Asia and other emerging markets. AZN has reported good Q2 results with its sales growing by 3% to 8.43 billion, which were above market expectations. Although the company’s sales decreased in U.S. and Europe, it was more than compensated by its performance in the emerging countries with sales increase of 10%. The company has been fighting generic competition to its major drug Crestor, but has received a boost from the USFDA approval for its potential blockbuster drug Brilinta for the treatment of acute coronary syndrome, which has the potential to generate billion dollars of revenue for the company. AZN, at a stock price of USD46, is trading at a PE of 6.5x CY12E, at a substantial discount to its peer group average of more than 9.0x. The stock has a very high dividend yield of 5.9% and the company is also embarking on a share repurchase program which will further increase its EPS. It has a return on equity of 37% and has one of the best operating margins in the industry at 40.3%
Eli Lilly & Co (LLY) - LLY is a global pharmaceutical giant with major focus on neuroscience, oncology, cardio, anti-infectives, endocrinology and animal health business segment. The company’s blockbuster drugs include Zyprexa / Relprevv, Cymbalta, Alimta, Humalog, Cialis, Humulin, Evista and Gemzar, which have revenues in excess of $1 billion. The company’s animal health business has been a strong growth driver for the company with growth of more than 20% YoY. The company potential blockbuster drug solanezumab is expected to complete its current phase results in 2012 and a positive announcement in this front is expected to be a strong trigger for the share price. The stock has a high dividend yield of 5.5% and is expected to continue its high dividend payout. It is currently trading at a PE of 8.4x CY11E, which is slightly less than the peer group average PE multiple. We think it is a reasonable multiple for this stock as the company is expected to have a top-line growth in single digit figures, while its EPS is expected to have a slight decline. In terms of operating margins, at 28.2% the company is lagging behind its European peers. The stock has given positive returns of 10.5% to its share holders in the last year, and the company has a return on equity of 46%.
GlaxoSmithKline Plc (GSK) - GSK is one of world's largest pharmaceuticals company with ~7% market share. Its Q2 CY11 sales declined 2% to GBP6.7 bn due to absence of sales from drugs from H1N1, withdrawal of Avandia and generic competition to Valtrex. Excluding these, the company has posted positive growth which we see as a favourable performance. Moreover, the company has guided for similar positive performance for the remaining part of the year. The stock has a high dividend yield of 5.6%. The operating margin of the company is 39.9%, which is one of the best in the industry. At a PE of 9.5x CY12E, the stock is trading at slightly above its peers. The company has also embarked on a share repurchase program of more than GBP1.8 bn, which should lead to EPS improvement. GSK is also concentrating on its presence in emerging countries through branded as well as generic drugs.
PDL BioPharma Inc (PDLI) - PDL BioPharma, formerly known as Protein Design Labs, is a biotechnology company that creates humanized antibodies. The company’s revenues have grown at a CAGR of more than 20% since 2004. The revenues are mainly from royalty payments from pharma companies that use PDLI’s antibody humanization technology to provide treatments for cancer and other infectious diseases. The company generated $344 million of revenues, mainly in the form of royalty payments. The company has an operating margin of 88% and net profit margin of 44%, which is far better than the other companies in this list as it has no cost of goods -- the company has not yet commercialized any products. It has a dividend yield of 10.1% and a market capitalization of $842 million. The stock is trading at a forward PE of 5.8x, which we think is a lower multiple for a company that has strong research capabilities and robust growth prospects.
Bristol-Myers Squibb Co (BMY) – BMY is a global pharmaceutical giant whose major therapeutic focus areas are cardiovascular, oncology, virology and immunology. BMY has a strong pipeline of products and we expect FDA approval for its potential blockbuster drug Apixaban used for atrial fibrillation in second half of 2012. BMY has net sales of USD19.5 bn and some of its blockbuster brands include Plavix (Sales: USD6.7 bn), Abilify (USD2.6 bn), Yeyataz (USD1.5 bn) and Avapro / Avalide (USD1.2 bn). The stock is trading at a PE of 13.9x, which is at a premium to the average of pharma peers of 9.0x. We believe that the stock will continue to trade at a premium due to its robust pipeline. The strong operational capabilities of the stock are demonstrated by its high operating margin of 32.7%. The stock has a high dividend yield of 4.6%.
Merck & Co Inc (MRK) – MRK is a pharmaceutical player with focus on both human and animal healthcare. Its focus areas are bone treatment, respiratory, cardio, immunology, derma, diabetes and obesity. Merck has merged with Schering-Plough, another pharma giant, which is expected to add revenue and earnings and further increases the scale of the company. It is expected to make $3.5 billion in cost savings from the merger. The company will prune its workforce, which is expected to result in cost savings of more than 10%, transforming in more than $4.0 billion savings. It is further expected to sustain its revenue growth with many product launches. The company has further embarked on a USD5 bn share repurchase program. Its Q2 results have also been good, with sales increase of 7% to $12.2 billion. The company has many late stage products including MK-7418 for the treatment of acute heart failure, MK-8669 for treatment of cancer and MK-0822 for osteoporosis. The stock is trading at 7.3x, which is a discount to its peer average. The stock has a high dividend of 5% and, over the long term, is a better bet than competitor Pfizer (PFE).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.