Inside Wall Street: 5 stocks for a healthy portfolio

Pharmaceuticals led by Lilly, Roche and Pfizer have exciting drugs to fire up their growth.

By Gene Marcial Jun 27, 2012 12:02PM

With the Supreme Court just about ready to strike down -- or at least severely push back -- what is popularly known as the Obamacare law, health care stocks have been in focus. What about pharmaceuticals? Cam the makers of medicine help keep your portfolio healthy, come what may?

 

Drugmakers have had their chests full trying to keep apace with the increasingly robust demand for new remedies while dealing with fierce competition from generic manufacturers and the difficult challenge of coming up with new drug therapies. The good news for investors is that the share prices of the major pharmaceuticals already have discounted the widely known problems they face.

 

"What has not been discounted is that some drug companies have exciting drugs in their pipelines that could easily reaccelerate their growth trajectories from the middle of the decade on," says Stephen Leeb, editor of the investment newsletter, Complete Investor. For investors, this means a "rare opportunity to buy high income and value with great potential for long-term gains," he argues.

 

Leeb, a top-ranked investment manager who is president of Leeb Asset Management, picks five stocks that he says have strong "potential accelerating growth out to the end of the decade that should outperform the market -- with minimum downside risks, thanks to their safe and high yields."

 

Here are Leeb's five pharmaceutical stock choices:

 

Bristol-Myers Squibb (BMY), selling at $35 a share, trading at a 17 price-to-earnings ratio, has a dividend yield of 4.1%;

 

Eli Lilly (LLY), now at $41 a share, trading at a price-to-earnings multiple of just 12.7, has a dividend yield of 4.8%;

 

Merck (MRK), changing hands at $38 shares, trading at a price-to-earnings ratio of 4.4, paying a dividend yield of 4.4%;

 

Pfizer (PFE), currently at $22 a share, trading at a price-to-earnings ratio of 10, has a dividend yield of 3.8%; and

 

Roche (RHHBY), selling at $42, trading at a price-to-earnings ratio of 12.1, has a payout yield of 4.2%.

 

Of the five, Lilly and Roche stand out because of their particularly exciting pipelines that include drugs with potential to tackle neurological disorders -- ailments that Leeb says have an especially urgent need for more effective new remedies.

 

Merck, on the other hand, while not directly active in neurology, has a new sleep medication that could help with some metabolic problems that according to the latest research, says Leeb, are triggered, or worsened, by lack of sleep.

 

Lilly has been facing particular challenges from generics as its leading drug, Zyprexa, the leading treatment for schizophrenia, already has lost patent protection. Three of its other major drugs that together account for more than 50% of Lilly's revenue, will have to contend with generic competition over the next 12 to 18 months. These drugs are Cymbalta, the leading drug for mild depression; Humalog, a major insulin product; and Evista, a drug for preventing osteoporosis in post-menstrual women.

 

Nonetheless, Leeb recommends Lilly because it has in the works a number of potential blockbusters, including neurological, cardiovascular, and diabetes drugs. "Any of them could be transformative drugs," says Leeb.

 

As to Swiss drug maker Roche, Leeb says it should be a core stock holding in any drug portfolio because of its dominant position in biologics through its subsidiary Genentech. Its leading product, Avastin, which deprives tumors of blood, and its derivative drugs are clear leaders in treating a wide variety of cancers, notes Leeb. A derivative of Avastin, Lucentis, is one of the leading treatments for wet macular degeneration, the chief cause of blindness among the elderly.

 

Among Roche's pipeline drugs is a novel drug for schizophrenia, the first molecule to affect the neurotransmitter glutamate, which, Leeb says, is an approach that many psycho-pharmacologists view as the Holy Grail for treating neurological diseases, from depression to various forms of psychosis.

 

Pfizer and Bristol-Myers are Leeb's picks for growth/income. He says Pfizer is recovering fast from the loss of its blockbuster Lipitor franchise. Its anticoagulant blood-thinning drug, Eliquis, which is being jointly developed with Bristol-Myers aims at preventing heart attacks, and its immunosuppressant drug Tofacitnib, has a multi-billion dollar market potential, estimates Leeb.

 

As for Bristol-Myers, apart from its joint work on Eliquis, it is developing a strong franchise in hepatitis C with its novel molecule, daclatasvir, which can be taken orally and which, in conjunction with other agents, treats refractory cases.

 

The bottom line is that after a lackluster stretch, says Leeb, these five major drug companies now have potential blockbusters under development that could propel their shares to major gains.


Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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