An Analysis Of 5 Major Drug Makers

Includes: ABT, BMY, JNJ, LLY, MRK, PFE
by: Mel Daris

In this article, I will analyze five major stocks in the pharmaceutical industry. I selected these five pharmaceutical stocks for my research because they are all riding a wave of expansion in booming international markets. In fact, the near term worth of these companies could almost be measured on their expansion into the world markets alone. Additionally, they all are facing similar headwinds, such as patent expiration issues. These factors all help to determine whether these five stocks are good candidates for investment. Here is what I found:

Merck & Co. (NYSE:MRK) has faced hard times in recent years with the settlement of $4.85 billion in lawsuits in November 2007 for one of its drugs, and again in late 2011, to the tune of $950 million for its fault in marketing the product. However, I believe that withstanding these large blows and getting back on track attests to the company's resilience. In fact, the fourth quarter of 2011, Merck posted a markedly better standing than it did in the same quarter of the year previous, recovering from a $0.17 loss per share in 2010, to $0.49 earnings per share in 2011. Additionally, the full fiscal year of 2011 makes a mockery of the company's 2010 postings, as it increased GAAP-compliant net income by nearly 8x, while increasing total sales by about 4.5%

The only issue presented in the near future is that the company's U.S. patent on SINGULAIRtm will expire in August 2012. However, there is still plenty of time in the year to compensate for this event. The company has begun attempts to introduce five new drugs to the market, with intent to have them released either before, or not long into 2013. If these products reach the market in time and are well received, the drugs will combat the certain short term losses presented with SINGULAIRtm's expiration.

Recent speculation by Merck suggests that due to lower than expected quarterly numbers, 2012 will end up being a somewhat flatter year than they had originally anticipated. As stated above, the main issue is the fall in sales of SINGULAIRtm. However, this is no reason to fret. If the fall in sales only produces a flat year as opposed to a down year, then I believe the future of Merck is a bright one indeed. In my opinion, Merck deserves a bullish outlook. Despite current projections for flat short term movement, the company has shown exceptional resilience in the past and is making great strides in setting itself up in the global market. Many analysts conclude that they would hold off on Merck. This is due mostly in part to the expiration and impending healthcare reform, which leaves the whole market on the edge.

Abbott Laboratories (NYSE:ABT) is a company that weathered the most recent economic crisis almost unscathed, and continued on its path to bigger and better things. In 2010, Abbott Labs had a number of acquisitions, commanding an enormous market share. The company has become so large, that it announced plans this year of intent to split in two.

This announcement is well-received with stockholders and other speculators, as it would do a number of things. The pharmaceutical industry typically comes with a higher risk. By splitting into two companies, investors can better manage their risk, opting to either invest more into the safer research branch (to be named at a later date) or to assume more risk in the pure pharmaceutical sales branch. Regardless of how investors choose to proceed afterwards, the news of the split has, and will continue to, bolster the stock price. In that sense, it may be a good time to buy now, as the company plans to split before the end of the year.

Abbott Labs shows no sign of slowing down; it boasts an increase in total sales of 4% from the 4th quarter of 2010 to the 4th quarter of 2011. Over the entire year, it shows an increase of sales that topples 10%, resulting in an additional 2% of net income.

The conclusion on Abbott Labs is quite clear from my perspective: I believe that Abbott Labs should be bought in anticipation for a bullish reaction to the company split. Any holdings thereafter should be divvied up based on the investor's risk appetite.

Johnson & Johnson (NYSE:JNJ) has had a significantly rougher time than the previous two stocks as of late. Much of their business has been lost to Merck & Co. and Pfizer (NYSE:PFE), due to what seemed like an endless supply of product recalls.

However, 2011 turned out to be a much better year for J&J. Thanks to international expansion, the company was able to find a revenue increase of 5.6%. It is my opinion that the company has relied heavily on their name as of late to keep the stock price at normal levels. The normalized price to earnings ratio is 22.2x, a little higher than industry standard, which hovers between 18-19x. This would lead me to believe that the stock is currently a bit overvalued.

While I would agree that J&J is a hero to the dividend interest seekers, I would not lay speculation into the fluctuation of stock price for a profit. It is my opinion that Johnson & Johnson will either remain flat until they can further expand international business at a steady rate in which they will continue to be bullish, or the price will begin to reflect bearish development relative to my over-valued prediction before it flattens out again.

Eli Lily & Co. (NYSE:LLY) does not appear to have a strong footing in the market at the moment. For a detailed overview of what Lilly may be looking like in the near future, one must look no further than the fourth quarter conference call for 2011. Specifically, look at paragraph number thirteen.

Here, they speak about how revenue and gross margin decreased by 2% primarily due to the patent expiration of the company's main drug Zyprexatm and others. The fact that gross margin was so clearly affected also brings worry. Not only did they lose a flagship drug, but they lost a margin-bolstering one. This alone is enough to be somewhat leery of Lilly at the moment. Though these cycles are to be expected of all pharmaceutical companies, there is an extra aspect to consider.

Going further, the company experienced increases in expenses in key areas. These expense increases cannot be overlooked at a time when revenue and margin are decreasing. Coupled with net income and earnings per share decreases of a whole 22%, there is a recipe for disaster brewing within Lily. Some may find comfort in the fact that the exclusion of the two expired drugs shows a revenue increase of 13%. In my opinion, this is a boon as opposed to a blessing. While the rest of the business is excelling, it may show that too much rested in the hands of only two products that had nowhere near ample relief for when the expiration date was approaching.

I would stay away from Eli Lilly & Co. for now, though I anticipate a bearish move. There is still a chance for the company to recover, should they find a replacement and market it effectively. Even at that, they would still have a large burning hole in their expenses.

Bristol-Myers Squibb Co. (NYSE:BMY) For a stock that I believe would be good to get in very soon and go long, look no further than Bristol-Myers. Between posting a net sales increase of 7% in the fourth quarter of 2011 and an increase in diluted earnings per share of 79%, the company shows a solid financial bearing to go into the new year with.

On top of solid financial reports in the end of the last fiscal year, Bristol-Myers recently acquired Inhibitex Co, which I believe may have contributed to slight declines in the stock price in early 2012 (coupled, of course, with forthcoming patent expirations), as the company focused on the acquisition and offered cash in the exchange. However, with the recent completion of the acquisition, I would see the stocks continue on a bullish slope.

The general consensus seems to be to hold off on the stock. I would agree with this only in the sense that the impending expiration of Plavix in 2012 (the company's current flagship drug) will certainly impact revenues. However, it would appear that Bristol-Myers has made, and is still making, great strides in preparing for the expiration. Through acquisitions and new partnerships, the company is doing a superb job in securing a foothold in the market. Should the company continue on this path with the similar results, the expiration of its cash cow will not send the stock plummeting. Stock prices will likely go down around that time, but in my opinion, that would be the perfect time to buy into this promising company.

Keep in mind however, that all businesses in this industry are facing looming constraints with impending health care reform in the U.S. In that regard, all of these companies stand in the same boat, which would lead me to say that this negative is somewhat "normalized", and will affect all of the companies in much similar ways, thus almost being discountable in relation to one company out performing another.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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