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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So which drug stocks now?
OK, so in this kind of environment what should you be looking for in a drug stock?
A Johnson & Johnson strategy at a less than a J&J price. Johnson & Johnson is expensive -- a PEG (price/earnings to growth) ratio of 2.15 on projected 2012 earnings per share -- for a reason. Its combination of industry-leading businesses in drugs, diagnostics, medical devices and consumer products gives the company amazingly predictable earnings growth. (It doesn't hurt that Johnson & Johnson is really good at what it does, with many of its units ranking No. 1 or No. 2 in their areas.) But that story is well known by investors, and in buying Johnson & Johnson, you pay not only for that stability but also for the company's reputation for stability. Investors are willing to take a lower return -- which means that they're willing to pay more -- because they know this story.
I think you can get an equivalent stability from the diversification at Roche (RHHBY). The company has a major and growing global franchise in cancer drugs and a solid diagnostics unit that is No. 1 in in vitro diagnostics. This New York-traded issue sells at a PEG ratio of 1.73. Even cheaper and more diversified -- at least until it splits into two companies in early 2013 -- is Abbott Laboratories. I'd hold shares through the split into AbbVie, a company that gets the current proprietary drug unit, and Abbott Laboratories, a company that gets everything else, because there's a very good chance that another drug company will make a bid for AbbVie. The PEG ratio on the combined company is 1.26. (The stock has been a member of my Jubak's Picks portfolio since September 2010.)
A big, fat, potentially profitable pipeline with lots of drug candidates that are relatively close to market.Novartis (NVS) fits this bill. The company announced recently that it has a target of 14 blockbuster drugs by 2017. (That's an increase from a 2011 forecast of seven blockbusters by 2017.) Among those blockbusters, the company believes, will be Afinitor for breast cancer. (The company increased its 2017 sales forecast for Afinitor to $2 billion from $1 billion.) The pipeline looks like more than enough to offset the erosion on Glivec, also a cancer treatment, which will lose patent protection in stages through 2023.
Novartis has one of the most cost-effective drug research operations in the industry. The company spends about $4 billion per new molecular entity versus the industry average of $5 billion. I think Sanofi's (SNY) pipeline is also impressive. Cancer drug Zaltrap and diabetes drug Lyxumia look to have blockbuster potential. Sanofi is managing the decline of Lovenox, a drug that helps prevent deep vein thrombosis and now faces generic competition in the United States.
Dominance in a big but concentrated market. This allows a drug company to leverage research spending on its existing knowledge base and to build up the kind of marketing unit that can get a new drug to market quickly and that can defend existing franchises. The drug company that best fits this description is Denmark's Novo Nordisk (NVO). I've written about this drug company, a leader in diabetes drugs and the world leader in insulin, frequently lately. The last time was just Tuesday, and my thinking hasn't changed much since then (see "5 below-the-radar-screen global stock market trends" at JubaksPicks.com).
You'll note that I haven't included current Jubak's Picks member Bristol Myers Squibb (BMY) in my list of five drug stocks I like. I will be selling those shares out of the portfolio and replacing them with shares of Novartis. Look for a write-up.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
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- Australia's woes may boost Cheniere Energy
- China slowdown hurts Yum Brands
- Apple pulls ahead in horse race with Android
- How long will Costco's dividend pop last?
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At the time of publication, Jim Jubak did not own or control shares of any company or fund mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any company or fund mentioned in this column. The fund did own shares of Novo Nordisk as of the end of September. Find a full list of the stocks in the fund as of the end of September on the Jubak Asset Management website.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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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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