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Morningstar on Big Pharma pipelines: Novartis best, Abbott worst

September 30, 2009 – Comments (2) | RELATED TICKERS: ABT , NVS , JNJ

Morningstar has an article evaluating the drug pipelines of Big Pharma. Basically, Novartis is the best overall and Abbott Labs is the worst. In terms of drugs in late-stage trials, GlaxoSmithKline and Johnson & Johnson do lead Novartis slightly; Novartis beats them in growth potential of present drugs. Pfizer and Merck/Schering trail slightly in late-stage drugs. 

 There's a consensus that Big Pharma is undervalued today due to unnecessary worries about health reform. I'd look to buy more of Novartis and J&J. 

Abbott is an interesting case. It yields more than J&J and is developing a track record of significant increases. Its current drug portfolio is strong and has relatively few near-term expirations. Josh Peters, editor of M*'s DividendInvestor newsletter, owns Abbott (and J&J). He projects that Abbott could grow its dividend by 10% annually, 2% faster than J&J. However, as the other M* article notes, Abbott's future pipeline is quite weak.

Abbott obviously needs to make acquisitions, and its financial strength means that it's in a position to do so. To be blunt, though, a strong pipeline of late-stage drug candidates is a better bet than potential acquisitions. I'd buy Novartis first, and Novartis actually yields more than Abbott. However, US investors need to note that Switzerland deducts a 15% (or so) tax. You can claim that from the IRS as foreign tax paid, so it's best (but not mandatory) to hold Novartis in a taxable account. Novartis also pays its dividends Euro-style, in one big whack once a year.