In this article, I am going to take a look at five pharmaceutical stocks to determine if they present a short opportunity, or whether they should be avoided completely. I will suggest that investors liquidate their positions in these equities or consider them for shorting based on my analysis of each stock's specific future uncertainties, current economic conditions, and unstable government conditions. I picked these five stocks because they provide an excellent starting point for discussion of the pharmaceutical sector.
Novartis AG (NYSE:NVS): This stock is currently trading around $57. Based on its 52-week trading range of $52 to $65, this stock is slightly above its yearly trading average. Analysts have its one-year target estimate at $61, which is a projected 7% increase. I don't agree with the analyst's opinions. I feel their projections are a little steep because of the projected drug revenue shortfalls and increased competition from generic drug makers. The annual dividend and yield is approximately $1.60, or a paltry 2.9%. Based on these two factors, this stock offers no great yield, especially when taking into account commodity prices that are on a tear due to the volatile international oil market and the U.S. government devaluing it's currency ( U.S. dollar). Moreover, with the announcement of the FDA's rejection of Novartis' competitors' leukemia drugs such as Dacogen, it becomes more of a guessing game for the success of Novartis' similar tumor and leukemia fighting drugs, such as Lucatumumab, Panobinostat, and Nilotinib that are currently in phase one and phase two clinical trials. If the FDA similarly rejects Novartis' leukemia drugs, it will most likely send its stock into a nose-dive. Novartis' stock price will tumble because investors will not see a justification in risk because of the projected loss of revenue through the unapproved drugs by the sole approval body for consumer use of the prescription drugs. In addition, the FDA has also laid out plans to license companies to create duplicates of pharmaceutical drugs. This new policy enables competitors to create inexpensive versions of higher level drugs, which command higher premiums, cutting into Novartis' profits. Therefore, Novartis, along with other big name drug-markers, are scrambling to invest and compete in the so-called "knock-off" market. This is reducing Novartis' profit potential, definitely in the short term and unknown into the long term. Taking into account these risks and its future prospects, profitability does not bode well for Novartis AG, at least for 2012.
Eli Lilly And Co. (NYSE:LLY): This stock is currently trading around $39. Based on its 52-week trading range of $33 to $42, this stock has almost reached its 52-week trading ceiling. Analysts have a one-year target at around $38, which is one dollar lower than the current trading price. The annual dividend and yield are $1.96 and 5% of the stock's price. In my opinion, the stock is not a good investment because it has reached its trading ceiling. This, coupled with my explanation below of the patent's expiring, the price, annual dividend, and yield makes the stock seem at a peak and ready to take a dip in price. Eli Lilly will experience lower profits because the patents are going to expire in the near future. Similar To Novartis, Eli Lilly is facing a wave of patent expirations, chiefly Zyprexa, which already expired in the 4th quarter of 2011 and made up 25% of all the previous few quarter's earnings. In my opinion, the pipeline looks weak, and Lilly may have to acquire in the biotech space to pick up some promising intellectual property. Because Lilly has a lot of drugs in the initial phases of the approval pipeline - 29 in phase one, 22 in phase two, and 12 in phase three - compared with only 2 in the end stages of regulatory review by the FDA, it's essential to look at purchasing smaller pharmaceutical companies. Because smaller pharmaceutical companies specialize in niche drugs, they have more drugs in the final stages of approval and would give Lilly a greater short- and long-term profit potential. Based on Lilly's current pipeline makeup, its short-term profit outlook looks very slim because the approval process takes years and there is no guarantee of approval for their projected drugs.
Merck & Company, Inc. (NYSE:MRK): This stock is currently trading around $38 per share. Based on its 52-week trading range of $29 to $39, this stock has almost reached its 52-week trading ceiling. Analysts have a one-year target at around $41, which is three dollars higher than the current trading price. The annual dividend and yield are $1.68 and 4.40% respectively. However, I do not believe the high dividend is sustainable, because its future earnings are gravely in doubt. The loss of patents on Lipitor, a cholesterol lowering medication and Xalatan, an ocular pressure reducing medication, made a noticeable dent of $500 million and $462 million respectively in 2011 Q4 profits. Along with Merck's lowered profit guidance for 2012, the company will also experience 2012 patent expirations for Viagra, Enbrel, and Detrol along with others this is not good news for Merck's bottom line. Personally, I would be a buyer only if the stock price dropped to $25 per share.
Teva Pharmaceutical Industries (NYSE:TEVA): This stock is currently trading at $44 per share. Based on its 52-week trading range of $35 to $53, this stock is performing on average relative to its 52-week trading average. The annual dividend and yield is $0.69 or 1.60%, which is a very low dividend and yield compared to its pharmaceutical competitors. The low growth is attributed to a larger year-over-year loss of some of its strongest performing drugs including Mirapex, Eloxatin, Protonix, Adderall XR and Lotreal. Growth at Teva is likely to be delayed. The company will have to wait upward of six to seven years before it's able to sell a generic version of Cubicin, which is currently under patent protection by Cubist Pharmaceuticals, Inc., cutting it out of the United States market for that amount of time. This is important because the FDA is setting up legal mechanisms to enable manufacturers, such as Teva, to create generic prescription drugs based on higher level, higher premium drugs. Because Teva has a long intellectual property acquisition time-frame, short-term profits will be compromised. Teva also lost future profitability because a competitor received the ok to market the generic version of Lovenox as well as having a government forced drug unit recall. I would only be a buyer of Teva at $25 per share.
GlaxoSmithKline's (NYSE:GSK): This company has recently experienced some negative news that has yet to play out regarding its stock performance. On February 6, 2012, GlaxoSmithKline discovered some patients, taking part in the second phase of trial number GSK2251052, came down with urinary tract infections. Phase two was done in partnership with Anacor Pharmaceuticals, Inc., a potential acquisition target for Glaxo, but both companies will take a hit as the current trial is likely going to be suspended for multiple months. GlaxoSmithKline's most recent quarter showed a decrease in earnings and a decrease in confidence by analysts and investors because of lower revenue and smaller gross margins. Earnings per share missed the projected figure of $0.78 per share with only a $0.39 per share profit. This figure was in line because of higher operating costs and lower profit margins. The projected gross margin was 72.8% compared with 74.3% for the previous quarter. The operating margin 26.9% versus the prior quarter's figure of 50%. I think Glaxo is weakening because there are more mishaps and it is trying to focus on too many drugs in its pipeline along with sizing up potential companies for acquisition. Until Glaxo is no longer plagued by medical trial issues and a potentially challenging earnings report, I would steer clear of shares.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.