Tuesday, September 23, 2008

* Goldilocks and the Three Pharms

Investors have long enjoyed a love-hate relationship with pharmaceutical stocks. This sector is unique in that their products are effectively scheduled for obsolescence via expiring patents. As such, a pharmaceutical company's pipeline of new products is just as important, or maybe more important, than the company's current offerings.

Let's play the part of Goldilocks and take a look at three leading pharmaceutical stocks and see how they stack up as potential dividend income investments (financial information as 9/19/2008):

Abbott Laboratories (ABT) - Yield 2.48%
ABT operates in five segments: Pharmaceutical, Nutritional, Diagnostics, Medical Devices and Animal Health. During 2007, pharmaceuticals accounted for 57% of operating revenues.

ABT's major products include: Humira to treat rheumatoid arthritis and psoriatic arthritis ($3.0 billion in 2007 sales); Biaxin a broad-spectrum antibiotic($724 million); Depakote a leading anti-epileptic and bipolar disorder drug ($1.6 billion); Kaletra an anti-HIV medication ($1.3 billion); and TriCor cholesterol treatment ($1.2 billion).

ABT has a relatively strong new product pipeline, with possible significant launches in both the medical device and pharmaceutical areas. Risks include generic competition to Synthroid and Biaxin, and pipeline disappointments.

Buy Below: $36.67
9/19 Close: $58.60
NPV MMA Diff: ($1,054)

Goldilocks Says: ABT is Too Hot! It is a good company with good near-term prospects. Unfortunately, it has already been priced into the stock. I last reviewed ABT on July 21, 2008 with a similar result.

Pfizer Inc. (PFE) - Yield 7.12%
The world's largest pharmaceutical company, Pfizer produces a wide range of drugs across a broad therapeutic spectrum.

PFE's major products include: Lipitor the world's largest-selling cholesterol-lowering agent (sales of $12.7 billion in 2007); off-patent Norvasc antihypertensive ($3.0 billion); Caduet a combination of Lipitor and Norvasc ($568 million); Zyvox a treatment for severe bacterial infections ($944 million); Vfend an antifungal ($632 million); Lyrica a treatment for nerve pain and epileptic seizures ($1.8 billion); Geodon an antipsychotic ($854 million) and Xalatan/Xalcom for glaucoma ($1.6 billion).

PFE is facing two significant problems: Patents expiring and a weak pipeline. Near-term expiring patents include Lipitor (estimated to expire 2010), Aricept for Alzheimer’s (2010) and Xalatan for glaucoma (2011).

Buy Below: $27.72
9/19 Close: $18.55
NPV MMA Diff: $60,093

Goldilocks Says: PFE is Too Cold! A recent agreement with generic drugmaker Ranbaxy delaying that U.S. launch of a generic version of Lipitor until the end of November 2011 will extend Lipitor's cash cow status and temporarily ease dividend concerns. However, PFE needs a blockbuster release to replace Lipitor. An obvious replacement is not in the pipeline. I last reviewed PFE on March 17, 2008 and expressed pipeline concerns then.

Eli Lilly and Co. (LLY) - 4.14%
LLY is a leading producer of prescription drugs offers a wide range of treatments for neurological disorders, diabetes, cancer, and other conditions. The company also sells animal health products.

LLY's major products include: Zyprexa, schizophrenia and bipolar disorder (sale of $4.8 billion in 2007); Cymbalta, a potent antidepressant, ($2.1 billion); Diabetes care products ($3.2 billion); Gemzar, lung cancer and pancreatic cancer ($1.6 billion); Cialis, erectile dysfunction ($1.2 billion); Evista, osteoporosis ($1.1 billion); Alimta, lung cancer ($854 million); Forteo, osteoporosis ($709 million); and Humatrope, human growth hormone ($441 million).

Zyprexa has a patent expiration of 2011. Actos for Type 2 diabetes goes off patent the same year.

Buy Below: $45.12
9/19 Close: $46.69
NPV MMA Diff: $4,978

Goldilocks Says: LLY is Just Right! (Well, Almost) LLY has a diverse drug portfolio with limited near-term patent expiration exposure, and more importantly a robust pipeline. LLY is trading slightly over my buy below price. It will periodically dip below the $45.12 (such as last week). I last reviewed LLY on July 14, 2008 and felt it was a good buy on dips.

The buy below price is the minimum of the Mid-2 (as described in Fair Value Data) and price needed to generate the minimum NPV MMA Diff. (as described in Measure What's Important) with a 5% premium added for ABT and LLY. As always, you will need to do your own research and reach your on conclusion as to appropriateness of adding any of these securities to your portfolio.
Tags: [ABT] [LLY] [PFE]