Berko: Time to sell drug stocks?
Friday, January 03, 2014 7:00 AM
Dear Mr. Berko:
About two years ago, you gave a blanket recommendation for drug company stocks because you said Obamacare would bring in billions of dollars of new sales each year. So in October 2011, we invested $3,500 each in Lilly, Merck, Bristol-Myers Squibb, Mylan, Teva and 250 shares of Pfizer at $20 because I use its Celebrex drug. Today all those stocks, except Teva (which is disappointing), are up very much, but Obamacare hasn’t gotten off the ground. Do you think I should sell these stocks? We have a special interest in Pfizer because, in addition to our 250-share purchase, my wife has 367 shares from when she used to work for them, and Pfizer is our biggest investment. We read your column every day, so please tell us your advice.
R.S., Jonesboro, Ark.
Teva Pharmaceutical Industries Ltd. (TEVA-$39.84), the world’s largest generic drug company, had some pipeline failures in its branded segment that clipped revenues, cut profits and chopped its stock performance. And pressing competition from low-cost manufacturers in India and China and the failure of its highly touted oral multiple sclerosis drug (Laquinimod) to meet phase three trial goals, also cuffed TEVA’s stock appreciation. But TEVA’s fall from grace in the last few years may be a good entry point for investors. The 2.8 percent yield is attractive, the dividend growth has been impressive, the shares trade at a low 8 times earnings, finances are rock-strong and its vertically integrated operations, plus a new CEO, persuasively argue in favor of holding the stock as well as increasing your position. TEVA, which enjoyed an average price-earnings ratio of 22 before the recession clobbered the market, should reasonably trade at a P/E of 14 to 17. Some believe it can be a $75 stock in the coming three to four years.
Pfizer Inc. (PFE-$30.14), supposedly the world’s second largest pharmaceutical company, after spinning off Zoetis Inc. (ZTS-$31.64), its animal health care division, should have the “whole world in its arms.” However, poor planning, an unexciting CEO, a sleepy board of directors, various patent expirations over the next few years (Celebrex, Viagra, Zyvox and Lyrica) and sluggishness of some of its franchised products (particularly Lipitor and Prevnar) don’t bode well for PFE’s future stock price. So the top line is likely to remain under pressure for the next 18 to 24 months. However, some on the Street believe that PFE’s oncology segment will be the company’s next growth stimulator. PFE has been marketing three very impressive oncology drugs: Xalkori for lung cancer, Inlyta for kidney cancer and Bosulif for leukemia. It may take another 24 or so months before their sales begin to make a difference in PFE’s revenues. As a result, the majority of the company’s research is now centered on eight promising oncology drugs in phase three trials and four drugs in phase two trials.
And one of these eight drugs, Palbociclib, for the treatment of breast cancer, has clearly met all the clinical endpoints in phase three trials. Palbociclib could be on a fast track for Food and Drug Administration approval late next year or in early 2015, and the Street believes its annual revenue potential is in excess of $4 billion a year. You should continue holding PFE. Its dividend is safe and will probably be raised annually for the foreseeable future.
And keep Lilly, Merck, Bristol-Myers Squibb and Mylan, too. Drug stocks are enormous profit centers. One hundred tablets of Celebrex (100mg) cost the uninsured consumer $130; however, the cost of the active ingredients is about 75 cents. Norvasc (10mg) 100 tablets cost the uninsured consumer $180, but the cost of the ingredients is 20 cents. Paxil (20mg) 100 tablets cost $200, though the ingredients cost $7.70. Vasotec (10mg) cost $102, and the active ingredients cost 22 cents, and Prozac (20mg) will cost you $225, while the active ingredients cost 15 cents. Not even the Mafia earns that kind of vigorish.
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