In recent years, Abbott Laboratories (ABT) has been everything a buy-and-hold investor might want. In the past 10 years, its earnings have increased an average of 8% and book value has increased an average of 10%. It has raised its dividend every year. In fact, the dividend has gone up 39 years in a row. And the company's stock price has followed suit, rewarding its shareholders handsomely.
In its first quarter of 2012, Abbott hummed right along, posting earnings, excluding special factors, of $1.65 billion, or $1.03 per share -- a 13% advance from the same quarter of 2011. Revenues were up nearly 5%, to $9.46 billion. The sales and profit advance was largely on the blockbuster Humira, the ubiquitous treatment for rheumatoid arthritis. In Abbott's first quarter of 2012, sales of the blockbuster were $1.93 billion, up 23% from the year earlier period. The medication is not scheduled to lose patent protection until 2017. Yet, as it approaches the zenith of its sales curve, it will account for up to half of Abbott's pharmaceutical sales, so the push is already on to find a means to replace that lost revenue late this decade.
The big news for Abbott, of course, is the impending tax-free spin-off of the pharmaceutical division into a separate company. Abbott has been a bit vague on the details, but it seems likely this will occur in the fourth quarter of this year. Shareholders will then be left with shares of one of the world's leading pharmaceutical companies, providing tremendous cash flow, stability, income, and modest growth, along with a potentially faster growing medical equipment, nutritional products, and generic medicines business.
Abbott has done an unusually effective job of building and maintaining a promising and diversified drug pipeline. At present it has 20 compounds in either Phase II or Phase III testing. While some of these medications have tremendous potential, such as Abbott's interferon-free Hepatitis C medication, it is virtually impossible to predict which will have enough market potential to be considered blockbuster candidates. Abbott in recent years has not simply relied on its own considerable laboratories to develop new medicinal compounds; it also has used its cash hoard to buy promising joint ventures and medications.
Pfizer (PFE) has shown that there is great value in nutritional and animal care divisions. Those divisions will be staying with Abbott after the spin-off, of course, and will be great drivers of growth in the new company. The spin-off is likely to entail a situation where the sum is worth less than the parts. I will certainly look into buying the new Abbott. The pharmaceutical division is in better shape than most competitors, but growth will be hard to come by, especially as Humira loses patent protection. Tread with care.
Eli Lilly (LLY), that high-flying pharmaceutical giant of the 1980s and 1990s, is still kicking, but perhaps with less punch than a couple decades ago. Right now, it reminds me of the old prison adage "dead man walking." I just don't see where Lilly would be able to support a return to the $70-$90 per share price range it traded at when it was perceived as a growth company, with P/E ratios of around 30, back at the turn of the century. Lilly makes far more money now than it did then, but Wall Street is all about expectations, not reality, and expectations for Lilly just are not there.
Despite my own maudlin view on this company, it is far from being irrelevant. Lilly is the tenth-largest pharmaceutical company in the world with 2011 sales of an all-time high $24.3 billion. Lilly had a decent enough first quarter of 2012. Due to steeply lower sales of Zyprexa, overall sales were down 4% to $5.602 billion. Profits were down a whopping 26% to $1.027 billion, or $0.92 cents per share.
Zyprexa, used in the treatment of schizophrenia, had been Lilly's leading selling medication, amounting to nearly 20% of overall revenue for the company in 2011. But it lost patent protection in the fourth quarter of the year, and sales are expected to slip 40% to 50% this year. Lilly's top-selling drug in the first quarter of 2012, the antidepressant Cymbalta, similarly loses patent protection in 2013. Pretty much all of the company's billion-dollar annual sales drugs will lose protection by 2017, so we look now to see how many promising medications Lilly has in Phase III trials.
Lilly's pipeline does not compare with the likes of Merck (MRK) or Abbott. Earlier this month, the company received FDA approval for a new testing unit to diagnose brain plaques in Alzheimer's candidates. Earlier this year the FDA also approved a Type 2 diabetes medication, Jentadueto. The problem with Lilly's pipeline in general is that even if things go well, I see it as unlikely there will be vast applications for these products. The company's large animal health unit continues to prosper, with revenues in the first quarter of 2012 up 33% from the first quarter of 2011 to $491 million.
Management has offered guidance for full year 2012 earnings of $3.15 to $3.30 per share, which if true would still represent a 25% to 29% decline in earnings from 2011's $4.41 per share. And things are likely to get worse before, if ever, they get better. While Lilly does get some price support in the form of a generous 4.7% yield, analysts see Lilly's earnings falling another 6% on average annually over the next five years. I too cannot see Lilly maintaining even the lower profitability levels it is at today. I would avoid an investment here.
PDL Biopharma (PDLI) is a smaller, Nevada-based company with a unique niche in the pharmaceutical world that I like. PDL does not have any patented drugs in the U.S., European Union and Japan; the bulk of its revenues come from licensing deals. PDL does hold patents for a variety of humanized antibodies and proprietary proteins that aid disease treatment and prevention. The company has seven different licensing deals for these compounds around the world. It has not paid a dollar of capital expense in years. However, the risk is that the patents and/or licensing revenues on these compounds expire by 2015.
Licensees around the world are busy getting approvals for medicines utilizing PDL products, so the company's revenues and profits look solid for the next couple of years. Yet, the fact that some 80% of PDL's sales are to a single buyer, Genentech/Roche Holding AG (OTCQX:RHHBY), lends additional risk. But the reason the stock is trading at a price to earnings ratio of 5, has a 9% yield, and a 0.30 5 year PEG is that there is a chance that after 2015, PDL may just fall off a cliff. Speculators, take note.