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Adding more Big Pharma to my CAPS Portfolio



June 28, 2010 – Comments (10) | RELATED TICKERS: SNY , NVS , GSK

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


-  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. 


-  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


-  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. 


-  Will lose patent protection for $5 billion drug Singulair/

Sanofi-Aventis - 7.0x / 4.8% yield


-  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.


-  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.


-  The second largest player in the hot generics sector.

-  The most diverse business mix of the companies mentioned, only 60% pharma.


-  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


- 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. 


- More expensive than the other companies mentioned, but still cheap. 

GlaxoSmithKline - 9.4x / 5.7% yield


- Fewer patents expiring than other companies mentioned.

-  Owns solid consumer-health brands including Geritol, Zantac, Nicoderm and Polident.


- 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.


10 Comments – Post Your Own

#1) On June 28, 2010 at 3:13 PM, JakilaTheHun (99.91) wrote:

Any thoughts on LLY?

The three big pharma stocks I've considered are PFE, LLY, and SNY.

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#2) On June 28, 2010 at 5:09 PM, GenericInvestor (71.91) wrote:

Forgot about BMY.

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#3) On June 28, 2010 at 7:13 PM, vriguy (69.58) wrote:

I completely agree the sector has mouth-watering valuations. I'm long Roche, Novartis, Johnson and Johnson, and Abbott and have added to all these positions in the last couple of months.

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#4) On June 28, 2010 at 7:53 PM, FreeMortal (28.74) wrote:

Being from Indianapolis, I have some familiarity with LLY.  Here is my impression.

1. Lilly is quite good at hiring a high calibre employees and retaining them for many years.  Every LLY employee I have ever known is rather bright and loves his/her job.

2. The city is in the pocket of Lilly and will do almost anything to keep them happy. Lilly gets all the breaks.

Disclosure: LLY is a significant part of my real portfolio.  Very long.

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#5) On June 28, 2010 at 8:13 PM, rofgile (99.53) wrote:

Good post - I added most of these to my CAPS today.  I own PFE and GILD in real life.

 I think these are all great buys.  Dividends are important right now, many of these companies stocks have fairly low volatility, so the risk isn't so bad + they are at such cheap valuations that the downside risk is less than the upside.  In a deflationary scenario, which is what I am most concerned about right now - a dividend paying stock with stability sounds great.



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#6) On June 29, 2010 at 6:29 AM, TMFDeej (97.71) wrote:

Hey Jakilla.  LLY has an awesome dividend, but it has one of the worst patent expiration cliffs in the industry.  Around a third of its revenue is scheduled to go generic in the near future.  Adding insult to injury, most analysts aren't all that excited about its pipeline either.

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#7) On June 29, 2010 at 6:30 AM, TMFDeej (97.71) wrote:

Thanks for reading, Genericinvestor.  

I hold a personal grudge against BMY, not though any fault of theirs, but my own.  I was very interested in the company's Mead Johnson spin-off when it happened a while ago, but for some reason I passed on it.  Needless to say, MJN has gone on to become a huge winner :).  BMY is the most expensive at Big Pharma.  Having said that, it's not like 12 times earnings is actually expensive, just relatively speaking.  It faces looming patent expirations on Plavix, Abilify and Sustiva, but it supposedly has a solid pipeline.


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#8) On June 29, 2010 at 6:31 AM, TMFDeej (97.71) wrote:

Thanks Rof. 

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#9) On June 29, 2010 at 6:59 AM, JakilaTheHun (99.91) wrote:

Thanks for the analysis, Deej.

That seems to be the common theme among critics of LLY.  I can't say I understand the industry enough to have my own opinion on that.  

However, I do wonder if that's actually a good reason to buy into LLY.  It does have a better management team than most of the big pharma companies and it seems like expectations are awfully low due to the patent expiration cliff. 

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#10) On June 29, 2010 at 1:37 PM, blake303 (28.61) wrote:

What is the typical discount on drug pricing after patent expiration?  

I have been considering initiating a position in LLY. Most analysis I have read assumes that revenue generated by LLY's drugs nearing patent expiration evaporates entirely, which I find absurd. Sitting $1 from its 52-week low with a div payout ratio of approximately 50% and positive catalysts like the recent insulin partnership with Wal-Mart, I believe that Jakila may be on to something.

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