Investment Opportunities In 10 Big Pharmaceutical Companies

by: Marc Courtenay

"There's nothing more powerful than an idea whose time has come", said Victor Hugo (1802-1885), recognized as the most influential French writer and poet of the 19th century. The man who brought us "Les Miserables" and "The Hunchback of Notre Dame" has been proven right on the above quote time and time again.

The idea that prescription medications can make us live longer, feel better, and even enjoy our lives more has swept the western world. Over half of Americans take at least one prescription drug each day for a chronic condition, this according to a USA TODAY report- and that report is now almost 4 years old. Among seniors, over 28% of women and 22% or more of men take at least five medications on a regular (usually daily) basis. The above-mentioned report stated that a Karen Walker of Paterson, N.J., takes 18 prescription medicines daily for high blood pressure, diabetes, chronic back and shoulder pain, asthma and the painful muscle disorder fibromyalgia. Personally, I know of a number of Americans over the age of 65 who are taking 10 or more different prescribed medications every single day.

Annual spending on prescription medications grew from $559 in 1992 to $2,810 in 2010, this according to the Prime Institute for Families USA.

The data from one report showed that over the last 5 years, the retail price for the most popular brand-name drugs increased 41.5%, while the consumer price index rose only 13.3%. In a survey conducted by the federal government for its Consumer Price Index, which incidentally included the price for generic drugs as well as brand name drugs, it showed a price increase of 3.4%, which is also far above the rate of inflation for 2009.

The biggest percentage increase for a brand name drug was for Boehringer Indelheim's incontinence drug Flomax, which increased 24.8% even though the patent for the drug expired last year. The generic version of the drug is tamsulosin. The price rose 6% in 2009 to $5.40 a day for AstraZeneca's (NYSE:AZN) Nexium. For Plavix from Bristol-Myers Squibb (NYSE:BMY) the increase was 8.8% to $5.06 a day; for Prevacid from Takeda, the price rise was 7% to $5.50 per day, while 20 mg Lipitor from Pfizer (NYSE:PFE) rose 4.1% to $4.03

The 10 most prescribed drugs and the 10 best-selling drugs in the U.S. read like a "Who's Who" in the world of Big Pharmaceuticals. It is with this kind of knowledge that investors can see some opportunistic trends.

Invest in yourself and in the products you are using

For example, I take an average of two prescribed medications (plus one prescribed "medical food" called "deplin") each day. One of the medications that I use is made by a publicly-traded company French company, Sanofi-Aventis (NYSE:SNY).

Sanofi engages in the discovery, development, and distribution of therapeutic solutions to "improve the lives of everyone" according to the company's website. Sanofi offers a range of healthcare assets, including a broad-based product portfolio in prescription drugs, OTC/OTX, generics, vaccines, and animal health.

From an investment perspective, Sanofi pays a 3.7% dividend, has year-over-year quarterly earnings growth of 26%, and an operating margin of 21%. Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.

Speaking of debt, Sanofi reports almost $25 billion in debt, and with the fact that they are headquartered in Europe, that is a significant negative. That being said, Sanofi and Novartis (NYSE:NVS) the Swiss pharmaceutical giant that pays a 3.6% dividend and is selling at less than 10 times forward earnings, are being avoided by investors due to locale.

This is the kind of situation that smart investors are looking for! Profitable companies with "pipelines" filled to over-flowing with new products that are being shunned over the fact that they reside in Europe. For Pete's sake, these are multi-billion companies with billions in cash.

Novartis has over $11 billion in "levered free cash flow" and trailing-twelve-month revenues of almost $59 billion. Its dividend is well-covered and when you read the company's web site, you see its future is very bright.

Earlier I mentioned Astrazeneca PLC (AZN). It too seems ridiculously undervalued, with a forward PE ratio of 7.5. This $62 billion market cap company is determined to create value for its shareholders. This U.K.-based "cash cow" generated $33.55 billion last year through its ongoing efforts to discover, develop, and market their prescription medicines for cardiovascular, gastrointestinal, infection, neuroscience, oncology, and respiratory and inflammation diseases worldwide.

Its products include Crestor for managing cholesterol levels; Seloken/Toprol-XL for hypertension, heart failure, and angina; Atacand for hypertension and heart failure; Nexium for acid reflux; and Synagis for the prevention of serious lower respiratory tract disease caused by respiratory syncytial virus in pediatric patients. That's why Astrazeneca is sitting on total cash (most-recent-quarter) of $10.78 billion and pays a 3.6% dividend that I think will be increased this year.

Looking at a one-year technical chart shows some reasonable entry-price levels to consider. I've also considered a comparison one-year chart for Astrazeneca and Bristol-Myers so you can see the contrasts. By the way, since Astrazeneca has only a $63.2 billion market cap and an impressive prescription drug line-up and a deep enough "pipe-line" of future products, don't count them out as a possible take-over target.

When buying "Big Pharma", look for the inconspicuous

Everyone is chasing yield these days, and the more popular names like Abbott Labs (NYSE:ABT), Pfizer and Johnson & Johnson (NYSE:JNJ) are looking quite extended.

Many investors are looking for takeover candidates and companies that may be sought by bigger "fish". In 2011, global healthcare deals were up 6% to $127 billion, in part because of a 43% rise in acquisitions of U.S.-based pharmaceutical companies, this according to Marc Lichtenfeld, the Associate Investment Director of The Oxford Club.

It's a well-known fact that a number of Big Pharma companies will be losing revenue in 2012 because a significant number of patents will be expiring on some of their blockbuster drugs. For example, Lipitor, which is made by Pfizer, will now have an FDA-approved generic version that costs half as much as the brand name.

It wouldn't surprise me to see several big pharmaceutical companies try to acquire other companies as a form of replacing the earnings lost when their mega-drugs loose their patent protections. Marc and I both agree that one of the "targets" for the Big Pharma "acquirers" is Bristol-Myers Squibb (BMY). It is still a much smaller company than its competitors like Merck (NYSE:MRK), with an almost $117 billion market cap, and Pfizer, with a $168 billion market cap.

Bristol-Myers Squibb has a market cap on around $57 billion, and from an investor standpoint pays a sweet 4% dividend. The company is trading at a forward PE of nearly 17, but that's for the very reasons mentioned in the above paragraphs. Plus, Bristol-Myers Squibb has a strategy of combining the strengths of a traditional pharmaceutical company and a biotech company. In fact, the company considers itself "a global biopharmaceutical company that discovers, develops, and delivers innovative medicines that help patients prevail over serious diseases".

Bristol-Myers Squibb focuses on areas of serious unmet medical needs, such as cardiovascular disease, mental illness, cancer, HIV/AIDS, hepatitis B and C, rheumatoid arthritis, type 2 diabetes, solid organ transplantation, and Alzheimer's disease. Its global reach and integrated commercial and manufacturing capabilities, along with the advantages of flexibility, innovation and entrepreneurial business style, are the hallmarks of its success. Bristol-Myers Squibb has a very strong balance sheet, with around $7 billion in cash and a share buyback program of $3 billion. This also hints that it may be undervalued. The one-year chart is impressive as well.

Another reasonable acquirer for Bristol-Myers Squibb might be a company like GlaxoSmithKline (NYSE:GSK), the U.K.-based company that together with its subsidiaries, engages in the discovery, development, manufacture, and marketing of pharmaceutical products, over the counter (OTC) medicines, and health-related consumer products worldwide.

GlaxoSmithKline offers pharmaceutical products in various therapeutic areas comprising respiratory, HIV, central nervous system, anti-bacterials, metabolic, vaccines, oncology and emesis, cardiovascular and urogenital, and dermatologicals.

With its almost 5% dividend and selling at just over 12 times forward earnings, this global giant with a market cap of $219 billion continues to lose a good deal of revenue with its diabetes drug Avandia. Avandia was shown to increase the risk of heart attack for those who use it. In the past, Avandia helped generate between $1 and $3 billion in annual sales, and in 2012 it also loses its patent. GlaxoSmithKline may want Bristol-Myers for its diabetes drug Onglyza and the fact that Bristol-Myers generates over $5 billion a year in cash, with levered free cash flow of $5.26 billion.

Look overseas for yet another pharmaceutical bonanza

I'm referring to Teva Pharmaceutical Industries (NASDAQ:TEVA) the Israeli-based pharmaceutical company that develops, produces, and markets generic drugs (approximately 1,450); and proprietary branded pharmaceuticals in various therapeutic categories and active pharmaceutical ingredients worldwide.

This productive company just hired a former senior executive at Bristol-Myers (Dr. Jeremy Levin) as its new CEO, and he has plans to make this company a lucrative star. The Board at Teva

...conducted an extensive search process and concluded that Dr. Levin, with his recognized strategic vision and deep knowledge of the pharmaceutical industry is the right person to lead Teva going forward. He has the demonstrated track record, broad global experience, and impressive leadership skills to continue to grow Teva.

Dr. Levin has more than 25 years of experience in the global pharmaceuticals industry, leading companies and people in the creation, development and delivery of medicines. He is recognized as a leader in creating commercial and R&D alliances. He joined Bristol-Myers Squibb in 2007. He has had direct responsibility for strategy, alliances and transactions, and managed its portfolio of alliances.

It's in the "strategy, alliance and transactions" area that Dr. Levin will help Teva increase its shareholder value and profitability as a company. Although its dividend is a paltry 1.5%, shares of Teva are selling at less than 8 times forward earnings. A forward PE of 8 tells me and potential acquirers that this company is undervalued. Its balance sheet reveals it has $1.12 billion in total cash and $3.81 billion in operating cash flow. Its year-over-year quarterly earnings were a negative (-) 12.80%, so there's room for improvement and upside earnings surprises in the future.

So there's a fairly complete overview of some of the "Big Investment Opportunities" that are available right now in the Big Pharma sector. The world is becoming more dependent on their products, and the door is open for acquisitions and joint-ventures that will enrich their bottom line earnings and the price of the their shares. Meantime, most of these companies pay you enough dividends to make waiting worthwhile.

This investment theme is " idea whose time has come".

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AZN, BMY, TEVA over the next 72 hours.