On Friday, January 27, 2012, Mad Money host and former fund manager Jim Cramer stated that he feels many big pharmaceutical companies are in primed to appreciate. Cramer noted that a turnaround might now be imminent after a prolonged period of deteriorating prospects.
Many investors avoided big pharmaceutical equities due to concerns over expiring patents for some of the most successful prescription drugs. Some of these expirations have already occurred, while several additional patents are set to expire in the next two years. Cramer argued that these stocks are now beginning to rally because this patent cliff represents a worst of times scenario for big pharma.
Cramer noted that many large cap pharmaceutical companies are trading at relatively low price-to-earnings multiples, while providing above average dividends. Cramer claimed low P/Es and high yields are not all that matters, but that several large-cap drug companies also house multiple potential blockbuster drugs in their pipelines, many of which could easily replace the anticipated revenue losses associated with recent and upcoming patent expirations.
Cramer noted that five large-cap pharmaceutical companies meet his criteria, each of which is highlighted below.
Biogen Idec (NASDAQ:BIIB)
Cramer claimed Biogen has a strong pipeline of biotechnology drugs, with a primary focus on developing a treatment for multiple sclerosis, a chronic disease that affects the nervous system, and for which there is no cure. Biogen already has two approved MS treatments, which combine to total about 60 percent of BIIB's revenue.
Cramer pointed out that one of BIIB's pipeline MS drugs, BG-12, is an orally delivered medication that has the potential to be the most effective MS treatment. Cramer stated that the drug might be on the market before the end of 2012 and that within three years it might be able to generate $1.5 billion in sales.
Cramer stated that both Bristol-Myers and Pfizer are working together on a potential blockbuster drug called Eliquis, an oral anticoagulant designed to prevent stroke in patients with atrial fibrillation. Atrial fibrillation, also known as A-fib, is the most common form of an irregular heartbeat.
Cramer noted that Eliquis appears to be highly effective and might be approved within the first half of 2012. Cramer also claimed that, if approved, the drug has the potential to produce over $5 billion in revenue, which would be divided between the two companies. Cramer also noted that BMY now provides a 4.2 percent dividend yield, while PFE provides a 4.1 percent dividend yield.
Merck lost patent protection on two hypertension drugs in 2010 and is set to lose patent protection on both an asthma and allergy drug within 2012. Nonetheless, Cramer thinks MRK may provide steady growth over the next five years, due to some already released diabetes and HIV drugs that he considers potential blockbusters.
Cramer also noted that Merck is developing Anacetrapib, a heart medication that Merck hopes will be shown to help lower bad cholesterol levels while increasing good cholesterol levels, with both changes decreasing the likelihood of heart disease. Anacetrapib is currently in Phase III FDA. Cramer stated he believes that if Anacetrapib is approved, it might produce as much as $10 billion in annual sales. Cramer also pointed out that while investors wait, they will appreciate MRK's 4.3 percent dividend yield.
Cramer noted that Sanofi, the world's largest drug company, will lose patent protection on three of its main revenue producing drugs in 2012. Still, Cramer stated that the company recognized the problem and took measures to smooth out its revenue stream going forward. Additionally, SNY presently provides a 4.9 percent dividend yield.
More particularly, Cramer explained that Sanofi is investing in high growth drugs, including a growing presence in diabetes medications, and vaccinations that should develop brand loyalty. Cramer also stated that SNY has a growing generic drug business, which will help smooth out and expand its future revenue streams.
Johnson & Johnson (NYSE:JNJ)
Cramer explained Johnson & Johnson faces multiple challenges, including some associated with a series of recent product recalls. Nonetheless, Cramer argued that he believes JNJ's pharmaceutical business is stronger than people realize, with most of its patent expirations already in the past.
Unlike many of the other large-caps Cramer discussed, Cramer noted that JNJ is not investing its future on any single blockbuster product, instead developing numerous smaller ones. Additionally, JNJ now provides a 3.5 percent dividend yield and is a dividend aristocrat that has raised its dividend every year for the last 49 years.
These equities may provide investors with not only the opportunity to invest in a growing business, but also to support the research and development of new treatments that may help society. Of course, there is no guarantee that these companies will continue to find new medical advancements, obtain approval for them, or that their competitors will not one day make their current innovations and pipelines obsolete.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.