Good buys in biopharma

Pfizer has multiple health care businesses and Elan has Tysabri royalties and a would-be acquirer.

By TheStreet Staff Feb 28, 2013 3:05PM

thestreet logoDroplet Falling from Pipette into Test Tube copyright Andrew Douglas, Radius Images, Getty ImagesBy Marc Courtenay

 

When it comes to investments, I love to be a sleuth and uncover deals that everyone and their mother-in-law doesn't already know about. If I find a gem in a sector that's in an uptrend, all the better!

 

The pharmaceutical and biopharmaceutical sectors have been marching steadily higher. My personal favorite bellwether for the sector is Pfizer (PFE), which is often referred to these days as a "biopharmaceutical company." Heck, why not, and look at how PFE has been doing price-wise over the past year.

 

pfe chart

What a fine-looking chart, and we can't help but notice Pfizer's year-over-year diluted quarterly EPS growth, which is stellar. No wonder it can pay a great dividend with the prospects of raising that dividend year after year.

 

Its one-year chart speaks for itself. This company is on fire.

 

Focusing on what makes a biopharmaceutical company great, is what Pfizer does so well: One can plainly see on its website its greatness defined through diversity.

 

The website reads: "To maximize new opportunities in biomedical research, and bring more innovative medicines to more patients more quickly, Pfizer has created two distinct research organizations. The PharmaTherapeutics Research & Development Group focuses on the discovery of small molecules and related modalities; and The BioTherapeutics Research & Development Group focuses on large-molecule research, including vaccines."

 

Pfizer is setting the industry standard in another important way. It has developed an enhanced commercial operating structure. Pfizer has nine diverse health care businesses: Primary care, specialty care, oncology, emerging markets, established products, consumer health care, nutrition, animal health and capsugel.

 

Next up is Elan (ELN), one that deserves a look after attracting a bid from privately held pharmaceutical investor Royalty Pharma. Since its inception in 1996, U.S.-based Royalty Pharma has been buying pharmaceutical intellectual property.

 

It owns royalty interests in products such as GileadScience's (GILD) HIV drugs and Abbott Laboratories' (ABT) arthritis drug Humira. 


On Feb. 26 the Wall Street Journal reported that Royalty Pharma had made a $6.55 billion takeover offer for the Irish drug company. It wouldn't surprise me if the company and its shareholders turn the deal down cold.
 
Elan has its own investment plans after the sale of its stake in the multiple-sclerosis drug Tysabri. "ELN sold its 50% share in Tysabri to its long-term partner  Biogen Idec (BIIB) for $3.25 billion in a deal announced Feb. 7, retaining a royalty of 12% of Tysabri's global net sales for the first 12 months after the deal is completed," according to the Journal.
 
Last Friday Elan announced it would return a wallet-pleasing $1 billion to shareholders. It also outlined plans to restructure approximately $600 billion in debt and focus on making acquisitions of its own with the proceeds of the Tysabri sale.

"As previously announced, in anticipation of executing and closing the recently announced Tysabri transaction, the Company's Board of Directors, Executive Management and advisors have been working for over a year on a number of strategic transactions that, should they be consummated, would be to the benefit of our public shareholders," Elan said in a statement.
 
"Returning capital through share repurchases, diversifying business and asset risk/reward through non-traditional business structures while simultaneously capturing the long-term high margin royalty income from Tysabri will offer a compelling investment thesis for our current shareholders," the statement went on.
 
Let's look at ELN's one-year price chart, which also shows its trailing 12-month free cash flow. You're about to see an anomaly that is partly explained by the $600 million in debt I mentioned.

elan chart

Royalty asked ELN shareholders to decide if they want to remain invested in a company that will consist of cash and the Tysabri royalty "...while Elan's management pursues its announced strategy." It won't be an easy decision either way.
 
The whole drama here reflects what an enormous prize the intellectual property of the biopharmaceutical companies is. Right now ELN shareholders know that what they own -- mainly the Tysabri royalties -- is worth at least $11 a share.
 
If we can find the next undervalued and overlooked biopharmaceutical company, we may be able to experience what ELN shareholders are enjoying. Might that be a company like Amarin (AMRN)? Stay tuned.
 

As of the time of publication the author was not long any of the shares of companies mentioned in this article.

 

 

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