How Does The Patent Exclusivity Factor Affect The 3 Top Dividend-Paying Healthcare Companies?

Includes: AMRN, AZN, BMY, GSK
by: StockRiters

The message that the company you invested in has sent a dividend check your way does not fail to bring a smile to even the most diehard appreciation-oriented investor. Dividend paying stocks are however more fancied by retirement-oriented investors and/or investors who, among other things, want steady cash flows from their portfolio.

Before the Securities and Exchange Act of 1934, which made it mandatory for companies to disclose financial information, declaration of dividends was one of the few indicators of a company's attraction for investors. Despite the fact of increased transparency, dividend yield remains a sufficiently valuable indicator to justify investment.

Many investors think that dividend-paying firms are low-return investments. Typically, mature companies that have stepped out of the initial growth phase need to pay dividends to retain investor interest. Companies that have faith that their growth offers better opportunities to investors often plow back their earnings for fueling growth.

All said and done, choosing where to invest is tricky business involving an effort for striking a balance between regular cash flows, appreciation and liquidity. Whereas dividend yields are important for income, without appreciation it may be difficult to beat inflation. Liquidity is necessary for those just-in-case scenarios.

Dividend yield is basically the return on your investment expressed as a percentage arrived at by dividing annual dividend per share by price per share. The reciprocal of dividend yield is price/dividend ratio.

Pharmas have been a good source of dividend income for investors for generations. However, revenues and earnings of major pharmaceutical companies engaged in research and development and marketing of patented drugs have been impacted by loss of patent exclusivity due to new regulations. Patent exclusivity is different from getting a drug patented; it gives a pharmaceutical manufacturer the exclusive right of selling a drug for three to seven years before a generic version can come in the market.

Today we look at three of the top dividend paying stocks in the healthcare sector (drug manufacturers) - AstraZeneca ADR (NYSE:AZN), Bristol-Myers Squibb (NYSE:BMY) and GlaxoSmithKline ADR (NYSE:GSK).

First-up, here is how the three stand in relation to each other.

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Source: Google Finance


AZN is a global pharmaceutical company engaged in research and development and marketing of drugs for six areas of healthcare- Cardiovascular, Gastrointestinal, Infection, Neuroscience, Oncology, and Respiratory and Inflammation. Recently it was in the news for the withdrawal of its stock buyback plan by the newly appointed CEO, Pascal Soriot. The new regulations on patent exclusivity have resulted in fall in overall revenues of AZN just as they have with other pharmaceutical companies. The coming 5 years will see AZN losing exclusivity on 50% of its existing patents. The company has not ventured into generic and other healthcare products as yet. Despite discouraging third quarter results , Zacks reiterated its neutral rating on AZN with a target of $49.00. Although quarterly revenues fell 15% (CER), the company's core earnings of $1.51 per ADR for the quarter beat Zacks' estimate of $1.46. The share price of AZN is currently trading at $46.74, down $0.73 from the price it was at the start of October, touching $47.79 in mid-October.

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AstraZeneca is a strong company with a dividend yield of 6.14%, a 5-year EPS growth rate of 13.67% and price to book (stock price divided by book value per share) at 2.58 as compared to 8.75 of GSK. A lower price to book ratio is often used as an indicator that the stock is undervalued. Moreover, there are also indications that Amarin (NASDAQ:AMRN), the biopharmaceutical company that we wrote about extensively here when we discussed Vascepa, is AstraZeneca's potential acquisition target.

Bristol-Myers Squibb

This is another global pharmaceutical that is engaged in research and development, manufacturing and marketing of a wide range of medications. The company has manufacturing facilities in United States and across several other countries. Almost the same size as that of AstraZeneca in terms of market cap, BMY's dividend yield is 4.09%. It has shown an impressive 5-year EPS growth rate of 28.37%. With price to book at 3.51, the company is almost fairly valued at this point in time. BMY stock price closed at less than 8% below its 52-week high of $36.34 at end of trading day November 1, 2012.

From October 1, 2012 to November 1, 2012, the stock has lost only $0.43, touching $34.51 weeks before the third quarter results.

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Like other major healthcare companies, BMY also showed a substantial fall (30% on the year) in third quarter revenues ($3.74 billion). The company suffered non-cash impairment charge of $1.8 billion due to discontinuation of development of a nucleotide polymerase being developed for treatment of hepatitis-C. BMY reported a loss of $0.43 per share as compared to last year's profit of $0.56 per share. With generics capturing a larger market share, analysts were anticipating that the fall in sales of BMY's best-selling cardiovascular drug Plavix and anti-hypertension drug Avapro to continue in the third quarter.

The poor quarterly results do not seem to have had much impact on BMY stock and it is expected that the loss in Plavix sales will be compensated as before by increase in sales of its anti-cancer and anti-diabetic drugs, Yervoy and Onglyza.

GlaxoSmithKline ADR

GSK is a global developer and manufacturer of pharmaceuticals including vaccines, over-the-counter medicines and a wide range of healthcare consumer products. It has an impressive dividend yield of 5.09% but with price to book at 8.75, appears slightly overvalued. Like its rivals in the industry, GSK too has had to suffer loss of patent exclusivity. However, it has been through the so-called patent-cliff earlier than others. The loss of sales in third quarter has been more due to price pressure and low demand for certain vaccines in Europe.

GSK has continuously been missing sales and earnings expectation for the last four quarters. Despite continued below expectation results, the stock was close to testing its 52-week high of $47.69 on October 5, 2012 when it touched $47.66. The stock is currently trading at $44.86.

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GSK is also continuing with regular dividends despite unprecedented fall in European prices. It declared its quarterly dividend this time also and shall be trading ex-dividend from 11/14/2012.

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.