Drug Stocks Could End Up Being Right Prescription for Portfolio

Drug Stocks Could End Up Being Right Prescription For portfolio [Milwaukee Journal Sentinel]


From Milwaukee Journal Sentinel (WI) (August 9, 2010)


Aug. 09--Many investors see nothing but gloom in big pharmaceutical company stocks.

Jeffrey L. Holmes, partner and research director at Red Granite Advisors LLC, sees opportunity.

Sure, their 10-year track record is lousy, health care reform and new technologies could change the landscape dramatically and Europe’s budget woes add pressure.

But falling stock prices have left low valuations and attractive dividend growth in a middling equity market, Holmes said.

A former hospital pharmacist and pharmaceutical sales representative who has analyzed stocks for 24 years, Holmes said he’s bullish on Big Pharma. The valuations on these stocks are cheaper than they’ve been in 15 years or more, he said.

"Pharmaceuticals are still one of the most cost-effective tools to maintain a person’s health. I don’t think that changes," Holmes said.

The number of drugs in many pharmaceutical company pipelines has grown, and they’ve been buying access to more with biotechnology acquisitions, he said.

The smartest pharmaceutical companies are using a European model, where instead of marketing only to physicians, they market to insurance companies, pharmacy benefit managers and other payers, Holmes said.

There’s been a "fair amount" of management turnover, he said, and companies have begun transitioning from "me too" copies of competitors’ products to developing their own new molecular entities.

"They just needed to wake up," he said.

Abbott Laboratories (ABT, $50.57), Abbott Park, Ill., isn’t a pure-play pharmaceutical company, but it has Humira, a therapy for rheumatoid arthritis and Crohn’s disease that is one of the best biotech drugs, Holmes said.

Abbott pays a dividend yield of 3.5%, and earnings are growing by 10% to 12% a year, he said. It is one of the leaders in moving into emerging markets.

Between dividends and price appreciation, Abbott investors could see compounded, annualized growth of 10% to 20% over the next three to five years, Holmes said. The biggest risk: potential competition to Humira, Abbott’s earnings horse.

Novartis AG (NVS, $50.27), Basel, Switzerland, is on both sides of the pharmaceutical fence, Holmes said.

Its Diovan for high blood pressure is one of the most successful traditional drugs, and Novartis is the second-largest generics producer.

"It’s well-positioned, has a good pipeline," he said. The company has a 3.88% dividend "and is trading at 10 times forward earnings," he added.

The biggest risk: Diovan patents expire in 2012.

Teva Pharmaceutical Industries Ltd. (TEVA, $49.85), Petah, Israel, is doing all the right things, Holmes said.

Teva pays a smaller, 1.45% dividend but has strong growth potential, he said. This efficient generic drug company recently made an acquisition that strengthens its position in the German drug market and is adding higher-margin branded products, Holmes said.

"They understand what it takes to compete on price and be efficient in manufacturing, and I think that’s something pharma is still learning," he said.

Investors are worried a generic version of Teva’s Capaxone might come to market, but Holmes says that’s a longer-term issue. Teva shares have traded in a 52-week range of $64.95 to $46.99 and could go as high as $65 in the next 12 to 18 months, he said.

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Posted: August 2010


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