12/6/2012 7:30 PM ET|
5 drug stocks for the New Year
A rough year full of worries is coming to an end, but new woes await. These stocks look best for a year of higher taxes and Obamacare.
For the world's big drug companies, it's the end of a dark nightmare.
Well, not quite the end. But it is the gray light before dawn. The worst seems to be over.
But you know what that means, right? You've seen this movie, right? New dangers threaten just when everyone thinks the coast is clear. (Zombies await everywhere.)
In the what-have-you-done-for-me-lately world of stocks, that means investors who have done very well with drug stocks in the past few years -- but had to worry through 2012 as the patents on profitable drugs expired in large numbers -- need to rethink their strategies. It's not that some drug stocks won't be big winners next year; it's just that I don't think investors can count on the rising-tide-lifts-all-drug-stocks environment of the recent past.
So how do you think about drug stocks now? On the surface, that seems like a strange question, but I'm asking anyway.
In this column, I'll tell you why I think that is the right question to be asking now. I'll suggest a way to answer it -- and a way to think about drug stocks. And I'll give you the name of five drug stocks that I think stand a good chance to outperform what I think will be a still-profitable but trickier-to-navigate sector.
Are the big gains over?
In 2011, the SPDR S&P Pharmaceuticals (XPH) exchange-traded fund returned 12.73%, compared with the 1.89% return on the SPDR S&P 500 (SPY) ETF. In 2010, the drug ETF returned 22.46% and the S&P 500 ETF returned 15.06%. You have to go back to 2009 to find a year when the return on the drug ETF (at 27.65%) and the S&P 500 ETF (at 26.37%) were roughly equal.
And given that 2013 looks like the year when the feared patent expiration monster starts to get chopped down to size, you'd think that the sector might be headed for even better times.
Next year looks great on this front. The total sales of drugs expected to lose patent protection in 2013 is projected at just $17 billion, according to Credit Agricole Securities.
So why does this look like a tougher environment for drug stocks? Let me give you five reasons:
- The fear of patent expirations is largely behind they big drug companies, but investors have already priced that event -- and the lack of fear -- into the prices of many drug shares.
- Healthy dividends turned the sector into a defensive play in a volatile market, which means some of the more defensive drug stocks -- Johnson & Johnson (JNJ), for example -- seem expensive if you factor the increased uncertainty of potential changes in the tax rate on dividends.
- The patent-expiration cliff has left its mark in the sector, with some companies -- Pfizer, for example -- downsizing and cost-cutting into what resembles a defensive crouch. (It's hard for me to conclude that the best use for the proceeds from Pfizer's sale of its nutrition unit to Nestlé (NSRGY) is to help fund a $10 billion share buyback.)
- The expiration of so many patents in such a short time has led to a sometimes-frantic effort to put more potential drugs in the pipeline. That seems to have increased the pressure on drug company research and seems to be leading to an increase in the failure rate (or at least the visibility of failures) of drug candidates during trials. Bardoxolone at Abbott Laboratories (ABT) is an example. Companies may also have pursued drug candidates that offer only modest improvements over existing drugs.
- Recessions and budget crises in much of the developed world have put pressure on drug reimbursement schedules from government and private-sector insurers. Everybody rightly expects that pressures on drug prices will increase, but no one is quite sure at what pace or exactly how. And no one knows how downward price pressures will balance out with the expansion of the number of insured as a result of programs such the Affordable Care Act (also known as Obamacare).
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VIDEO ON MSN MONEY
Sure lets send more troops to Afghanistan to guard Poppy fields for the Pain Management industry.
Under the Taliban poppy cultivation was on a steady down cline.
Since NATO occupation poppy cultivation has risen 800%
#1 consumer of all this poppy is from the fields of Afghanistan to the Pharmaceutical, black market ran by various clandestine gov backed agencies smuggling it into our country for you the #1 consumer. Osama Bin LADEN IS DEAD by best estimates 100 US backed al-Qaeda operating in Afghanistan
TSA Busted oxi's
I’m a heart patient and I can tell you that every time I go to my doctor’s office the Drug Reps. are storming the place. Last time there where seven of them that all came within an hour of each other while I was their waiting in the waiting room. They all where dressed to a “T” and pulling their big drug sample bags.
In another case, I was shocked; me and six other patients where having some nuke test done and we where placed in the lunch room of the office to wait our turn for the test because they shoot you up with the nuke stuff and then do scans at different times over four hours.
When it came time for lunch you would have thought it was Thanksgiving by the amount of food that was delivered to the office by one of the drug companies. Along with the food came a Drug Rep. to tell them about their products.
I think a lot of us keep taking the drugs because our doctor tells us to in order for him to get free trips and food. No telling what else these doctors are getting from the drug companies to push their products. My doctor told me he wants me to take my meds for the rest of my life. That could be 30 – 50 years. I’m taking five drugs.
I’m thankful that these drug patents are expiring. Just to give you an idle of the cost Plavics was about $3 per pill. Now the replacement is only .25 cents.
Monday consumer confidence was at a 4 year high, today it is down. I call Bull $hit. The election is over, odumbo won. The U.S. and America lost. Why not try telling the truth just once. It is not in them.======================================================================
Yes we know Marc math and logic is a leftwing conspiracy.
With the baby boomers all getting old these are good picks.A lot of drug stocks pay good
dividends.The Dow is up 5,000 points with Obama.You gotta love him!
All I hear out of Wall Street is BS AND THEN MORE BS!
I'm turning in my boots for waders and I hope we all don't have to go to wetsuits!
"behind they big drug companies"?
Did you read that?
Well, I hope you're all happy.
Jim Jubak smokes pot. This is what you get with legal pot.
"behind they big drug companies"
Beautiful. Jubak and MSN. They smoke pot and cannot speak English correctly.
Tell me 'What has Obama done for America" Give me a positive please!========
He made getting Bin Laden a number one priority and they got him.
President Obama slowed down the recession.
Made education a national priority.
He restored credibility to the american presidency where the world is looking to him. You'll find the world believes this except american rightwing whacks.
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Equity indices were pressured from the get-go after several heavyweights disappointed the market with their earnings and/or guidance, which led to some broader profit-taking. After ... More
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