Retirement Strategy: 5 Pharmaceutical Dividends To Buy Here … – Seeking Alpha

Posted by on Jul 26th, 2016 and filed under Pharmaceutical News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

Retirement Strategy: 5 Pharmaceutical Dividends To Buy Here … – Seeking Alpha

Resolving Retirement” subscribers had an advance look at this material.

Click to enlarge

Self-managed investors and retirees have the advantage of avoiding fees. That is more important than ever in this is low-yield world.

We think the best strategy for most self-managed investors is to employ a CD ladder and a US equity portfolio. We have been recommending a number of retirement investment themes lately, and now we want to look at the opportunities in two defensive, high income, beaten-down sectors: healthcare and financial services. Retirees should start investing in a retirement account and debating the benefits ira vs 401k .

Click to enlarge

We will tackle the financials in our next piece, today we will focus on healthcare.

What about the energy sector?

We are bullish on the long-term prospects of healthcare and financial services. The energy sector, however, seems to be stuck in a world with low demand. Secular stagnation seems very real, and if that is indeed energy’s problem, it should persist for quite some time, maybe even a generation.

But we think healthcare and financial services will bounce back, and right now the market is giving long-term investors excellent entry points in these two sectors.

Let’s have a look at the healthcare sector and search for the best investments.

Bad Karma in Pharma

Pharmaceuticals are a major sub-sector of healthcare, and they took a pounding last year on a simple tweet from presidential-hopeful Hillary Clinton. Martin Shkreli’s Turing Pharmaceuticals had just drastically raised prices on a life-saving drug:

Click to enlarge

Mrs. Clinton called for legislation to save consumers $ 100 billion over 10 years, with the funds mostly coming from the pharmaceutical companies.

The PowerShares Dynamic Pharmaceuticals Portfolio ETF (NYSEARCA:PJP) is the largest pharma ETF, and shows what the tweet, and the ensuing enthusiasm for the idea, did to the sector:

Click to enlarge

Almost a year on, the pharmaceutical stocks have still not recovered, even as many have grown earnings. The healthcare sector is down in large part to pharma weakness, and we think pharma is now the best opportunity in healthcare.

Overblown Reaction

There are a number of reasons to believe that any future drug legislation will not be as bad for the pharma stocks as the market fears.

For one thing, this “Turing” type of price gouging makes up a very small portion of the growth in drug costs, and is more the exception than the rule:

Last week, for example, CVS said that prescription drug “hyperinflation” – defined as price increases of more than 100% and as much as 5,000% – contributed less than 0.7% to overall cost growth for its PBM clients.

Another reason that future legislation should be palatable for most pharmaceutical companies is that much of the price gouging is done by a relatively small number of firms like Valeant (NYSE:VRX).

In addition, there are a number of laws already in place that are protecting the consumer. Even in the most notorious cases of Turing and Valeant, the companies pushed back hard on the idea that individuals would be unable to afford their drugs, and they seem to have a point (from the “more the exception” link):

When no such controls are in place, scenarios like the one portrayed in Clinton’s ad can happen. Part of the problem, though, is that the drug increases that Clinton complains about actually don’t fall to the consumer. Valeant, for example, said it approached the patient in the ad after being made of her situation earlier this winter, and offered her payment assistance. She apparently declined, saying she wasn’t bothered much by the price increase because her insurance plan covered the drug anyway, according to the version of events that Valeant posted on its website Tuesday.

For Turing’s part, it flatly stated that everyone that needs its drug will get it, and that was the plan all along. Safety nets like private programs, government programs, and insurance programs are in place to pick up the costs in many cases. We could not find the most current information, but pharma-sponsored programs are pervasive, with each major drug company already giving away more than $ 200 million annually in free drugs for needy patients as of 2010.

Another reason that pharmaceutical legislation fears are likely overblown is that some of the $ 100 billion in savings being called for is to come not from the drug companies, but from the insurance companies.

There is also the fact that this was a hot button political issue a year ago, but is now largely relegated to the back pages of political platforms. If legislation were passed that lets a political leader say “no American will ever be denied a drug they need but can’t afford again”, that would seemingly be the win that voters are looking for. This type of law should not be devastating to the pharma industry, given that this phenomenon does not seem to be happening nearly as much as perceived.

Yet another reason that we think this legislative fear is an opportunity rather than a rational reaction is that big pharma is just that – big. Pharmaceutical companies spend more money lobbying politicians than any other industry, and by a long way:

Click to enlarge

Politics and democracy run largely on money, and there are 3.3 billion reasons to think that the pharmaceutical industry will land on its feet.

Finally, one more reason to not be fearful of overly aggressive pharmaceutical legislation is profit motive. Pharmaceutical companies provide an essential service to society, and they do it for profit. By announcing that companies that enter certain markets – like expensive life-saving drugs – are going to have their profits confiscated, lawmakers virtually guarantee that these markets will be neglected.

The government is well aware of this – there is already legislation in place to combat it. Orphan drug legislation provides the profit motive for companies to develop and market drugs for rare conditions that would otherwise be money-losers. It seems very unlikely that the government will end up doing something so punitive as to discourage companies from trying to develop the top drugs in critical areas.

We may even see more “orphan” type legislation before we see “Turing” type legislation, as there are currently critical public health areas that are being neglected by companies for lack of profit motive. This is especially true in antibiotics.

A drug that is taken once a decade for 10 days is just not going to be anywhere near as profitable as something like a once-daily-forever cholesterol pill. Antibiotics are not profitable, and are not being developed:

This could be a widespread, deadly problem that takes years to combat, and time is getting short. The next pharmaceutical legislation could be a orphan-type opportunity for the pharma companies, rather than a misfortune.

For all of these reasons, we think the currently beaten-down pharmaceutical sector represents one of the best opportunities in the market. Let’s look at the individual opportunities.

Pharmaceutical Opportunities

Big drug companies that pay meaningful dividends look like a lucrative and rewarding opportunity right now. Here are what we consider the top 15 stocks in the area, starting with ten honorable mentions (data from yahoo!):

15) GlaxoSmithKline plc (ADR)(NYSE:GSK)

Yield: 5.22%

GlaxoSmithKline seems to be turning things around. The company has seen better days, as evidenced by its 131 P/E ratio. But Glaxo has pivoted to vaccines and consumer health, and is on the mend with a forward P/E ratio of just 16.8. If it gets there, then it will finally be covering its large dividend with profits, but not by much.

14) Bayer AG (ADR)(OTCPK:BAYRY)

Yield: 2.85%

Bayer is trying to acquire Monsanto (NYSE:MON) for its seed business to go along with Bayer’s agrochemical business. The market thinks Bayer is trying to overpay, but Monsanto is still holding out for a higher price. The acquisition situation is messy, but with a forward P/E ratio of just 11.6, Bayer is in deep value territory.

13) AstraZeneca Group plc (ADR)(NYSE:AZN)

Yield: 4.63%

We are not too keen on AstraZeneca’s management after they rejected a 2014 takeout bid from Pfizer (NYSE:PFE) for $ 118 billion – the market cap is just $ 76.7 billion today. But that low valuation could be making for a new opportunity, and AstraZeneca could be back in play.

12) Roche Holding Ltd. (ADR)(OTCQX:RHHBY)

Yield: 3.20%

Roche has some challenges coming down the pike with biosimilar competition, but its oncology platform is strong, and with a forward P/E of just 15.4, the value looks good.

11) Sanofi SA (ADR)(NYSE:SNY)

Yield: 4.04%

Sanofi is a well-diversified company, manufacturing everything from rare disease drugs to vaccines to animal medicines. Sanofi does not look like much of a value based on past earnings, with a trailing P/E ratio is just 22.4. But the future looks brighter with a forward P/E of just 13.0.

10) Novo Nordisk A/S (ADR)(NYSE:NVO)

Yield: 1.75%

Novo Nordisk is less of a value with a forward P/E of 22.3, but things seem to be going in the right direction. Sales were up 9% in the most recent report, quite a clip for $ 140 billion market cap company. Novo has large diabetes exposure, and attending to that pandemic could sustain the growth.

9) Novartis AG (ADR)(NYSE:NVS)

Yield: 3.33%

Here again with Novartis, the future is looking brighter than the past. The company has a trailing P/E ratio of 29.1, but a forward P/E of just 15.7. The mammoth $ 200 billion drug maker is in a wide range of markets:

Click to enlarge

And the pipeline looks promising as well:

Click to enlarge

We like the American companies better, but the Swiss Novartis is our choice for best foreign pharmaceutical company.

8) Amgen, Inc. (NASDAQ:AMGN)

Yield: 2.46%

Amgen is one of the most successful stocks of all time, up about 47,000% in its three decade history. But since the end of 2014, Amgen has stagnated:

Click to enlarge

The price flatness has come while it has been performing well and growing sales and profits. The market is just not valuing Amgen’s earnings very highly, with a trailing P/E ratio of 17.2 and forward P/E of just 13.3.

Those are some pessimistic numbers. What the market sees is that biosimilars are coming on the market to compete with some of Amgen’s most important drugs like Enbrel and Neulasta. Things are flush now for Amgen, but the future looks quite uncertain.

Amgen does have cholesterol fighter Repatha in the pipeline, and that could be a blockbuster. But Regeneron (NASDAQ:REGN) and Pfizer are competing in the space too, and Repatha could be the first, second, or third option. Amgen is also moving into making biosimilars itself, but the upside of their biosimilars is not likely to replicate the upside of their exclusive differentiated patented drugs.

Amgen has uncertainty, but it also has a long history of enormous success, upside in Repatha, cheap valuation, and the possibility that biosimilar competition will not be as bad as the market seems to fear.

7) AbbVie Inc. (NYSE:ABBV)

Yield: 3.60%

AbbVie was the pharmaceutical arm spun out of Abbott Labs (NYSE:ABT) in 2012. The company has been a one trick pony, relying on uber-successful anti-inflammatory drug Humira for more than half of its sales. Humira is useful in a wide range of conditions like arthritis, psoriasis, Crohn’s disease, ulcerative colitis and other inflammatory diseases.

AbbVie is a value headed for deep value at this price. It has a trailing P/E ratio of 19.0, and a forward P/E ratio of just 11.2.

The reason for the deep value is that like Amgen, AbbVie’s lead drug faces future biosimilar competition (the timing is being decided in court), and that is weighing heavily on the share price.

AbbVie has been trying to diversify and develop a pipeline outside of Humira, with mixed success so far. As it is, Humira is AbbVie’s lifeblood, and the company just cannot compensate for lost sales.

The timing and severity of Humira competition make it difficult to value AbbVie. Humira could be exclusive for five more years, or just one. Seeing as the market hates uncertainty, we think AbbVie is probably being valued more pessimistically than will turn out to be warranted.

6) Gilead Sciences (NASDAQ:GILD)

Yield: 2.15%

Even in a deep value sector, Gilead stands out quite a bit, with a trailing and forward P/E ratio both a little over 7.

Gilead has (had?) a blockbuster hepatitis C business, as well as a strong HIV program. The upcoming second-quarter results loom large, as Gilead reported a drop in sales of its hepatitis C drug Harvoni in the first quarter. Management indicated that this was an aberration and part of a “large positive”. But they also supplied some reasons for pessimism. Commercial Operations VP Paul Carter on the first-quarter call:

Then the VA went through a process of evaluating the clinical evaluation of product available from not just us, but obviously new entrants to the market. And that process took through till mid to late January. And we had to negotiate with the VA, and we did give the VA some extra discounts, which resulted in them putting our products on their formulary and also opening up, again, access to all patients within the VA. So there were no restrictions on patients. And again, we see this as a large positive. And as that funding got distributed around the VA centers, we started to see a very large uptick in VA treatment from about the middle of the quarter, and we anticipate that that will continue through the year.

The second area that happened, of course, is we had the entrance of Merck into the market, and so we judiciously exercised our contractual right to preserve access. And in a few cases, we did increase a little bit of discount to some payers to ensure that Harvoni in particular remained on formularies and with full access.

The third thing I think we’ve seen, as I indicated in the comments, was a slight and gradual shift of payer mix away from the commercial and Medicare Part D payers towards the more government payers, and that was probably about a 10% shift from quarter four to quarter one.

And then the final piece, as we indicated, is we did have a catch-up, a true-up of some rebate claims that came in respect to quarter three and quarter four that were a little bit higher than we estimated last quarter and which we put right during quarter one.

So the second quarter could show a pent-up bounce-back in Harvoni sales, or it could confirm newly trending weakness in Gilead’s most important market.

Gilead’s price has been weak for a while, and is almost 30% off its highs:

Click to enlarge

It could still fall further on the second-quarter sales report. On the other hand, trading at just 7 times earnings, news of strength in Harvoni could prove that Gilead is currently a coiled spring.

The Fab Five Pharmaceuticals

We like the above stocks, but we think the following five stocks represent the best opportunities in a bounteous pharma sector. Together, these five yield 2.70%.

5) Johnson & Johnson (NYSE:JNJ)

Yield 2.56%

53 straight years of dividend increases is not enough to keep Johnson & Johnson in the good graces of the market. The S&P 500’s trailing P/E ratio is currently 25.0, while Johnson and Johnson’s is 22.8.

J&J gets about 40% of its sales from drugs, 40% from medical devices, and 20% from consumer health products. Already, astute readers may be thinking, “if they broke up into three companies, they might be worth more.”

That is what major shareholder Artisan Partners believes, saying:

Two of the three businesses are among the worst-performing participants in their industry. In my view, separation of the three businesses would create immediate near and long-term value as greater focus and accountability is brought to bear.

Artisan is agitating for board changes and trying to get other activist investors involved. For now, J&J management is resisting, with CEO Alex Gorsky saying:

Because of our broad base across healthcare, we are uniquely positioned to be a partner of choice. This broad-based structure has helped us deliver strong, consistent and sustainable financial performance.

So a possible breakup could be a catalyst for J&J, but probably not soon, and not without protest.

In the meantime, management is projecting $ 6.66 to $ 6.76 earnings per share for 2016, which means a forward P/E ratio of 18.7 at the midpoint. That’s quite a value for such a steady and defensive business, especially one at all-time highs, in a market at all-time highs.

4) Merck & Co., Inc. (NYSE:MRK)

Yield: 3.13%

Merck is a well-rounded pharma company. It has a diabetes blockbuster in Januvia, and an exciting immuno-oncology treatment in PD-L1 blocker Keytruda, but the company does not rely too heavily on any one drug or market:

Merck has faced a protracted patent cliff the last few years, with sales falling and profits roughly flat.

Click to enlarge

But that seems to be in the past – in the most recent quarter, Merck grew sales at 4% in constant currency, led by diabetes and oncology.

Merck has a trailing P/E ratio of 36.0, but for 2016, management is projecting earnings of $ 3.65-$ 3.77 per share, for a forward P/E ratio of 15.8. That looks quite enticing for such a well-diversified company.

As for the future, Merck’s pipeline is strong, and again, well-diversified:

Click to enlarge

Merck looks like a terrific buy here for its well-rounded portfolio, exciting blockbuster drugs, cheap valuation, yield over 3%, and bountiful pipeline.

3) Eli Lilly and Co. (NYSE:LLY)

Yield: 2.55%

Eli Lilly is a well-diversified company like Merck, and also like Merck, has a robust pipeline.

Lilly’s best-selling drugs include Humalog for diabetes, Cialis for erectile dysfunction, and Alimta in chemotherapy. Lilly also has an animal health segment that is larger than any of its individual human drugs.

Lilly’s forward P/E ratio is 20.0, not the deep value we are seeing in some other pharmaceutical names. But Lilly’s pipeline is much more exciting than most drug companies:

Click to enlarge

Specifically, Olaratumab and Abemaciclib look promising in oncology, and Alzheimer’s drug solanezumab could be an enormous windfall. Solanezumab did not fare well in an earlier Phase III trial, but is proceeding anyway for the efficacy the drug may have in treating Alzheimer’s early.

Lilly may not be in deep value territory, but it’s a well-balanced business that pays a good dividend, and has potentially enormous upside in its pipeline.

2) Bristol-Myers Squibb Co. (NYSE:BMY)

Yield: 2.01%

Bristol-Meyers is another pharma stock with a great deal of upside. While most of the pharmaceutical stocks have struggled of late, Bristol-Myers has fought through the sector headwinds:

Click to enlarge

This performance has been powered by Bristol-Myers’ immuno-oncology program, which has been nothing short of phenomenal:

Click to enlarge

Opdivo in particular looks very promising in treating a number of cancers. Some types of cancer cells present a protein called PD-L1 to the immune system’s T cells, deactivating them. Opdivo works by blocking the T cells’ receptor for this protein, allowing the T cells to do their job. Bristol-Myers is not the only company in the space, but they are the clear leader.

This looks like a revolutionary, game-changing step in cancer treatment. Society is set to benefit greatly from Bristol-Myers efforts, and at a cost of six figures for treatment, investors are set to profit handsomely as well.

Don’t let Bristol’s P/E ratio of over 80 scare you off, its forward P/E is just 23.3, and that looks like it is just scratching the surface of the upside in the company’s immuno-oncology franchise. Add in a 2.01% dividend with this kind of upside, and even after a run-up, Bristol-Myers still looks like a great buy.

1) Pfizer Inc.

Yield 3.27%

Pfizer is another well-diversified pharmaceutical company, with top selling drugs for pain, erectile dysfunction, oncology, behavior, and vaccines, amongst many others.

With a trailing P/E ratio of 30.0, Pfizer is not much of a value on past earnings. But on forward earnings, it trades for a P/E ratio of just 14.0.

Pfizer is another company that has been facing a protracted patent cliff:

Click to enlarge

But that looks to be in the past – in the most recent quarter, Pfizer grew sales at a lusty 19.7%.

So Pfizer looks to have turned the corner on its sales growth and is available for a cheap price based on 2016 earnings. But where Pfizer really shines is in its pipeline.

Between now and 2020, Pfizer could have as many as 20 new approvals, including 10 new molecular entities:

Click to enlarge

Click to enlarge

Importantly, Pfizer is in the PD-L1 blocking game in oncology:

Click to enlarge

And perhaps just as importantly, Pfizer has entered the compelling gene therapy space.

Click to enlarge

Pfizer has a lot of upside, is well-diversified in its current portfolio, is available for a cheap price, and yields more than 3%. Pfizer is our choice for best pharmaceutical stock in a beaten-down sector.

Conclusion

The healthcare sector has been out of favor, with no stocks taking punishment more than the pharmaceuticals. But we think the political fears are overblown and the weakness is an opportunity. There are many good choices in the sector, most providing good yields. Johnson & Johnson, Merck, Eli Lilly, Bristol-Myers, and Pfizer look like the best buys in the sector.

For More on Retirement:

Check out our new Resolving Retirement newsletter, where we recommend our favorite individual stocks (click and see the performance).

Please follow us by clicking “Follow” next to “Premium Research” at the top of the page under the article’s title.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Leave a Reply

    Copyright 2011-2013, www.EHealthJournal.net, Web Site Development & SEO by SecondEffort, Inc.