Pharmaceuticals And The Law: It's Not What You Think

| About: GlaxoSmithKline (GSK)

Pharmaceutical companies are no stranger to the courtroom. Pfizer (NYSE:PFE) is in court, as it tried to protect its cash cow drug, Lipitor, and fears should be warranted here. Sanofi Aventis (NYSE:SNY) and Bristol-Myers Squibb (NYSE:BMY) are accused of side effect damages, though it should not hurt their already successful year. GlaxoSmithKline (NYSE:GSK), of course, paid out an egregious settlement, but still stands strong. Lastly, Novartis (NYSE:NVS) is challenging a law that may change the industry at large, but will it help its bottom line? Let's have a look at these companies individually.

Pfizer was recently sued for the delay of generic equivalents to its bestselling drug, Lipitor. The drug has been a cash cow for Pfizer, so you can't blame the business for trying to avoid any competition. It's just not legal. In fact, if all was well with the world, the generics would have been available as much as two years ago. Pfizer has, it seems, been very good at delaying the new drugs. And the plan seems to have worked in its favor. Over the last two years, that company's stock has risen by just under 53%, most likely due to the continuing high sales of Lipitor with no generic competition to contend with. It won't be long, however, before Lipitor generics start to eat away at the best selling drug in history (which reached as high as 37% of its market share). Analysts are predicting Pfizer will announce a sales drop of nearly 13% in its second quarter 2012 numbers from the year prior. Their collective opinion worsens for the third quarter, and the fall off of Lipitor revenue is certainly behind that prediction.

Sanofi and Bristol-Myers Squibb stand co-accused in a case regarding the drug Plavix -- a lawsuit that was brought to our attention in late June. A woman has filed a lawsuit stating that the drug caused her to suffer severe intestinal bleeding. In addition, the case states that the companies involved "were aware that the safety information was inaccurate and misleading." Aspirin can also be taken to treat the same symptoms for which Plavix is prescribed, and initial testing shows that Plavix may indeed result in a higher rate of gastrointestinal hemorrhages than aspirin is likely to cause. This is potentially bad news for these two major pharmaceutical companies, especially if allegations that state that they misled the public regarding the drug's safety turn out to be true.

Sanofi stock has declined by about 1.5% percent since the news of the lawsuit was made known, while Bristol-Myers Squibb has experienced a drop of nearly 2.5% following the news. Bristol-Myers Squibb has brought its profit margin back toward 25%, though its balance sheet took a hit in 1Q 2012 (posting a -$3.4 billion net change in cash from the previous quarter). Sanofi offers a decent EPS of 2.91, and analysts are predicting positive sales growth in quarters and years to come (up from last year's numbers).

GlaxoSmithKline is, of course, still in the news for having made the largest settlement in pharmaceutical history for the off-label marketing of its drugs. The total amount that the company will pay is $3 billion. This is a serious case, which has damaged the company's credibility. It may take a while for GlaxoSmithKline to regain public trust. But investors seem unconcerned. Over the last month, GlaxoSmithKline's stock has shot up by around 3.5%. Perhaps investors look at the large pharmaceutical company and think that such a large settlement will not ultimately affect it. They must see the $6.6 billion it made in revenue in this year's first quarter, but that's a number in great danger of decreasing.

Novartis is in the process of challenging Section 3(d) of the Patent Act, a law that prohibits "the practice of multinational pharmaceutical companies to extend their patent terms by making small and trivial changes to existing molecules and thereby preventing manufacture of generic drugs." The court date has been extended to September 11, 2012. Novartis is unlikely to win the case, but if it did it would mean higher revenues for the company and other pharma stocks. The company needs a lift of some kind, as it has experienced a dip of more than 2% in the last six months. At present, the company provides a dividend and yield of $2.48 (4.40%), and is trading at about midway in terms of its 52-week range. The dividend should keep investors happy, as should the 3.55 EPS that it offers, but what really impresses me about Novartis is the $9.2 billion it announced in gross profits in March. That should keep investors nearby, and if it can win its legal challenge, that might open doors to even more profit.

It would be easy to pinpoint how courtroom actions and reactions will affect a stock price, but GlaxoSmithKline is proving that whole idea wrong. Amidst the biggest settlement in court history, the company looks to be in decent shape (compare that with the fates of some of the major banking stocks, and it's a bit of a wonder). There's a lot to like here, starting with Novartis. Overall, the industry remains strong as a whole, and investors should be keen on checking in here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.