Let's start with a simple truth. Drug companies need new drugs to boost revenue. So it's a good sign that recently the FDA has been fairly active in approving new drugs. Bristol-Myers Squibb Company (BMY) and Eli Lilly and Company (LLY) shared a victory to bring in an estimated $370 million. Abbott Laboratories (ABT) got approval to help with cataracts, a large market to tap in to, and sales will help it add to the continued success of Humira. It just announced its second quarter numbers and all seems good here. Johnson & Johnson (JNJ) got good news about the advancement of its drug and it should hope that it can get everything else fast-tracked. Merck & Co Inc. (MRK) is also prepping an application for a new drug, which will help its already solid year.
Bristol-Myers Squibb and Eli Lilly finally experienced some success with their drug Erbitux. This was a significant step forward for the two companies because, up until now, the drug had not met with much success. The FDA approved the drug for targeted use against colorectal cancer, thereby expanding the use of the drug. The drug is also approved for the treatment of head and neck cancer. The news should be a boost for revenue as expectations are for a sales increase of about $370 million from the drug. This will help bring investors to two companies that already offer a solid dividend (the yield for Bristol-Myers Squibb is 3.89%, Eli Lilly is at 4.47%). Both companies have solid profit margins of near 25% and operating margins above 2011 levels.
Of the two, Bristol-Myers Squibb gets my buy recommendation, with an operating margin above 25%, and first quarter 2012 net income that exceeded the $1 billion for the first time. Though its revenue growth has dipped in the past few quarters, it still came in at a comfortable 4.79% in 1Q. Erbitux sales will help keep those numbers up, especially for Bristol-Myers Squibb.
Abbott Labs is also sitting pretty in terms of FDA approval. Recently, the pharmaceutical company received approval from the U.S. regulator for its Healon EndoCoat gel. This is a gel that is used in cataract surgery and that should make the entire procedure safer for the patient. This does not seem like a major step forward to me, and the news may have had a hand in the 2% jump Abbot's stock took the day of the announcement. Abbott just announced its 2Q numbers, with a reported revenue of $9.81 billion. It also reported a gross margin of 63% and an operating margin of just under 25%. It came in just under analysts estimates, though its $1.23 earnings per share (for the quarter) was better than predicted. Analysts expect continued success for Abbott and I think they're right, considering that top-selling Humira still has two more years until its patent expires.
Johnson & Johnson is lucky in that the FDA has prioritized the review status of its anticoagulant Xarelto. The review process will be sped up, a good sign for Johnson & Johnson as it could use a victory. The company's stock price has jumped by 9% in the last six months, and that might be due to drugs like Xarelto coming up soon. It's been an up and down year for Johnson & Johnson, as profit margins have jumped from 0% (quarter ending January 1) to near 25%, and back down. While it's true that Johnson & Johnson has consistently increased its dividend, and has supported a stronger EPS than its competitors, I think that the decrease from European sales (8.3% last quarter) will continue to hurt the company. It's already brought down its full-year earnings per share forecast, and it will need its Synthes acquisition to justify the huge price it paid for it. And fast.
Merck is preparing to apply for FDA approval following the successful Phase III trials of a new sleeping medication. The drug, which is called suvorexant, seems to be a very promising addition to the market as it seems effective in "safely promoting a good night's rest among patients suffering from insomnia". Since the news was announced, Merck's stock has experienced an increase of close to 10%. Merck is currently trading at around $42 per share (a four-year high) and revenue estimates are as high as $12.62 billion. I do believe that Merck is a bit overvalued right now, and analysts agree. Still, there's growth projected here, and a new drug in the pipeline is always encouraging. There's always a decent dividend to be had with Merck, though its growth in that department is a bit disappointing.
I believe Bristol-Myers Squibb is the best investment in this group, though there is not a lack of good options in the sector. I predict Abbott and Merck will perform well in the coming quarters as well, although investors should be more conscious about value and buying on dips. Johnson & Johnson's acquisition has set its numbers a bit askew, though it's still targeting earnings per share of $5 for the year. The pharmaceutical industry is on the rise right now and any chance to get in should be taken.
