Adding more Big Pharma to my CAPS Portfolio
June 28, 2010
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RELATED TICKERS: SNY
, NVS
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I have been singnig the virtues of Big Pharma here in CAPS for a while now, as much to my chagrin the companies in the sector continue to get cheaper. I have been long Pfizer (PFE) in real life ans CAPS and Merck (MRK) in CAPS only for some time.
This sector has become just too cheap to ignore. As an added bonus, most of Big Pharma companies pay excellent dividends, which I love. After reading an excellent article on the subject in Barron's this afternoon, Wonder Drugs, in I have decided to add shares of a couple more Big Pharma companies to my CAPS portfolio today . The specific companies that I am adding are Sanofi-Aventis (SNY), Novartis (NVS), Roche (RHHBY.PK), and GlaxoSmithKline (GSK). Here's a few tidbits on each of these companies, plus the two that I already owned, from the article:
Pfizer - 6.7x estimated 2010 earnings / 5.0% dividend yield
Positives:
- The Cheapest of all of the companies in the sector.
- Huge 5.0% dividend yield.
- "Pfizer's valuation implies 'the end of the world and negative growth in perpetuity,' says Ross Margolies, president of Stelliam Investment Management, a New York investment firm that owns the shares."
- Bought Wyeth on the cheap during the market meltdown.
- Dividend may increase as the Company pays down the debt that it took on in the Wyeth acquisition.
Negatives:
- Industry's worst patent cliff, including the expiration of Lipitor and Viagra.
- The company is so big that it's tough for new drugs to have an impact (the Exxon effect as I call it).
- Has pulled the rug out from investors in the past and cut dividend.
Merck - 10.5x / 4.3% yield
Positive:
- Recent merger with Schering-Plough greatly improved pipeline and enabled the combined company to cut costs.
- The stock is so cheap that one analyst believes investors are getting the company's drug pipeline for free and that its pipeline is the best amongst its U.S.-based competitors.
Negative:
- Will lose patent protection for $5 billion drug Singulair/
Sanofi-Aventis - 7.0x / 4.8% yield
Positive:
- One of the cheapest stocks in the sector.
- At 30% of revenue, the company has the sector's highest exposure to emerging markets.
- A large player in the rapidly growing insulin market.
Negative:
- Loss of patent protection on $3 billion drug Plavix.
- Increasing competition in the insulin sector.
- Possible links between Lantus and cancer.
Novartis - 9.5x / 4.0% yield
Author's note, I sold my stake in NVS to purchase PFE a for a number of reasons, including how much cheaper the latter was and the fact that I did not like NVS's Alcon acquisition.
Positives:
- The second largest player in the hot generics sector.
- The most diverse business mix of the companies mentioned, only 60% pharma.
Negatives:
- Overpaying for Alcon (ACL)?
- I personally dislike the way NVS' management went about the acquisition.
- Currency risk with Euro?
Roche - 11.1x / 4.0% yield
Positives:
- Now has full control of biotech powerhouse Genentech and its drugs Avastin, Rituxan and Herceptin.
- Analysts believe that The Company will experience the best growth in the sector.
Negatives:
- More expensive than the other companies mentioned, but still cheap.
GlaxoSmithKline - 9.4x / 5.7% yield
Positives:
- Fewer patents expiring than other companies mentioned.
- Owns solid consumer-health brands including Geritol, Zantac, Nicoderm and Polident.
Negatives:
- Patent issues with Advair.
- Potential Avandia lawsuits.
Anyhow, those are my quick notes from the article. As I mentioned I'm adding a number of these companies to my CAPS portfolio today. I'd love to hear what others think of this sector in general or of any of these specific companies.
Deej
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