Author Topic: Pharma  (Read 8371 times)

Viking

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Pharma
« on: May 27, 2010, 11:31:43 PM »
I have been spending a fair bit of time reading up on big pharma. Most of these companies trade at a PE under 10 and have healthy dividend yields. Some have little debt, some have lots. Some have solid drug pipelines, some less so. Most will see revenue hits at some point in the next few years due to patent losses. Demographic trends are very favourable. Not sure how changes in the US impacts all this. I like the idea of buying someone in Europe/UK given the dramatic fall in the Euro/GBP. 

Buffett owns a little Sanofi-Aventis (French) and the stock looks to be a very reasonable value.
I am less excited by JNJ; not as cheap, much larger and not likely to grow any faster.
There are a bunch of others: GlaxoSmithKline (GSK), Astra Zeneca (AZN), Novartis (NVS), Novo-Nordisk (NVD) and also in the US: Eli Lilly (LLY), Merck (MRK), Pfizer (PFE) and Forect Labs (FRX).

Given current valuations I like the idea of allocation 5% of portfolio to the top 2 or three players. Does anyone have an opinion of who the leaders are in this field? I am looking for suggestions on who to research further...


Parsad

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Re: Pharma
« Reply #1 on: May 27, 2010, 11:44:32 PM »
I think the measured basket approach you are thinking of is appropriate.  Of the larger players, several have lucrative patents that are expiring and will impact their future revenues.  Alot of the future potential lies within the smaller bio-tech players, but this field is a landmine, not unlike the dot-com era.  This will definitely be the area of growth and innovation, and the cash-rich large players will be snapping them up over the next decade.

On another front, I would not discount the future success of JNJ.  Alot of people seem to be doing that right now.  They are the #1 or #2 player in many fields of pharmaceuticals and retail pharmaceuticals.  Powerful brands that are not that different than Coke or Wrigleys...think Band-aid, Johnson & Johnson Baby Products, Acuvue, Neutrogena, Tylenol, Splenda, Listerine and...ahem...KY Lubricants!  Cheers!   
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Viking

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Re: Pharma
« Reply #2 on: May 27, 2010, 11:59:54 PM »
Sanj, I hear you on JNJ. I do like the company; it just does not look to me to be as cheap as some of the other big pharma's (and, yes, part of the reason JNJ is trading at a higher multiple is its business is more diversified and therefore revenue losses are less of an impact due to drugs losing patent protection).

If JNJ was to fall closer to $55 (=4% div yield) I would likely be a buyer!

Parsad

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Re: Pharma
« Reply #3 on: May 28, 2010, 12:04:26 AM »
Hey I agree with you...cheaper is always better!   ;D  Cheers!
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vinod1

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Re: Pharma
« Reply #4 on: May 28, 2010, 04:35:33 AM »
I have not looked into it yet, but BAX is something you might want to consider. It price got down because of a short term issue with a recent recall.

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

SharperDingaan

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Re: Pharma
« Reply #5 on: May 28, 2010, 04:50:48 AM »

Keep in mind that you're really making 3 bets here;

The euro players include an FX bet that the Euro will be stronger on repatriation than it is today: ie, a great return on Sanofi could turn into a loss if the Euro materially worsened. If you dont want this risk its US makers only.

It makes more sense to allocate > 5% to the sector, & 1 name; a long term warrant, option, convertible that limits the $ investment or reduces the risk. Your premise is that the entire sector will improve; to get a bad result, the individual maker has to perform materially below the average for the group. Somewhat unlikely.

5% spread over 2-3 names is minimally different to the typical index fund. To make it worthwhile you need to do materially better than the indexer to cover your additional cost; if you just do the same as the indexer that is highly unlikely.

SD

biaggio

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Re: Pharma
« Reply #6 on: May 28, 2010, 05:44:23 PM »
Health care has got to be due for a rebound.

Has been beaten down for the last several years.

If we consider the demographics, it has to be one of the most important industries going forward. the problem is we all want to be healthy, but who is going to pay the price?

Pharma's have been some of the best businesses around in the past.

I have been in the HMO's thru UNH (you need to have a system with checks + balances,,,the HMO's have already built out the infrastructure + relationships...the gov't needs them.

I have been worried about all the blockbuster products losing their patents so I have been in Mylan labs.

$135 billion /year of drugs losing patent protection over the next 5 years according to IMS

I have also owned FRX selling at $26...they will have $3.50 in FCF the next 2 years + $13 per share in cash, buying back their shares. They are losing patents on their 2 largest products + future will depend on their pipeline which appears promising. I like the fact that they are a $8 billion company with $4 BILLION IN CASH, so they dont need multple billion dollar products to restock pipeline (as opposed to larger pharma's)

biaggio

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Re: Pharma
« Reply #7 on: May 28, 2010, 05:48:10 PM »
I have been looking at LLY

almost 6% yield!

I think it is worth $60.

I just reviewed their latest 10K. I have attached my notes.

roundball100

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Re: Pharma
« Reply #8 on: May 28, 2010, 07:55:07 PM »
Re: LLY - isn't earnings growth (or lack thereof) a concern?

Viking

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Re: Pharma
« Reply #9 on: May 28, 2010, 09:53:33 PM »
The sense I have is pharma used to be greatly overvalued (look at a 10 year chart for pretty much any of the large players and it is UGLY); the driver was potential. Today it is clear to me that most are fairly valued and they may be quite cheap (trading near long term lows and low PE's); the driver is concern over products losing patent protection.

In the past, investors built castles to the sky (greed). Today they only see issues (fear). My guess is sentiment can't get much worse and we likely are near the low with valuations (for the sector).

Today I purchased BAX (vinod1, thanks for the tip). I am out of town for the weekend but will post my rationale next week. As I dig, I do like this sector and I will continue to dig and hopefully find a few more names... Thanks to everyone for sharing their thoughts (on both sides of the fence; please keep them coming!