Can You Profit From 4 Big Pharmas Making Headlines?

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Pfizer (NYSE: PFE) recently won regulatory approval from the U.S. Food and Drug Administration for a new rheumatoid arthritis pill. The product would compete directly with Abbott Laboratories’ (NYSE: ABT) injection Humira and Johnson & Johnson’s (NYSE: JNJ) Remicade.

The company’s treatment, tofacitinib, would be sold as Xeljanz, for treatment of moderate to severe rheumatoid arthritis for adults who have faced a poor response to methotrexate. The FDA has approved a 5-milligram dose that shall be taken twice a day. The company has also sought after a 10-milligram dose. FDA wants Pfizer to conduct two follow-up studies comparing patients treated with Xeljanz and other available treatments. According to Victoria Davis, a spokeswoman at Pfizer, the drug would cost about $2,055 for a 30-day supply at wholesale, a lower price than its competitors.

According to Seamus Fernandez, an analyst with Leerink Swann, Xeljanz may generate $2.3 billion in sales by 2018. Earlier in May, the company said that the drug would be used mainly by those patients who had a bad experience with Johnson & Johnson and Abbott products.

In August, FDA approval was delayed by three months, when the company decided that it would give the regulatory authority with some extra analysis of existing data. The agency has confirmed to schedule its decision on Nov. 21.

Johnson & Johnson Record Drug Sales Profits

Though Johnson & Johnson now faces new competition in arthritis treatments, the stock’s future looks excellent. Johnson & Johnson reported high earnings for its third quarter, mainly from sales of prescription medicines that have only recently rolled out into the market, as well as new medical tools that it acquired from its purchase of Synthes. This third quarter estimate allowed Johnson & Johnson to increase its forecast for 2012, estimating shares to reach $5.05 to $5.10.

Johnson & Johnson's stock went up 1.4% in response to these record drug sales.

Recently approved prescription drugs by Johnson & Johnson include Xarelto, to prevent stroke, Stelera, to treat psoriasis, and Zytiga, which treats prostate cancer. The drugs brought up revenue to $17.1 billion, marking a 6.5% increase from last year’s earnings. Sales in pharmaceuticals went up 7%, up to a high of $6.4 billion.

The company’s acquisition of Synthes has also brought in a 5.8% increase in operational sales growth worldwide. Medical devices comprise a major division of Johnson & Johnson, and revenues for the division increased to $7.1 billion, a growth of 13%, in 2012.

Johnson & Johnson’s other products include over-the-counter medication and therapeutics, such as Motrin or Tylenol, as well as consumer goods. Sales of these fell to $3.6 billion, marking a decrease of 4.3%.

Abbott Problems

Abbott Laboratories and its partner Reata Pharmaceuticals will be forced to review their spin-off plans after the trial of bardoxolone methyl, a drug for kidney failure that was disqualified for adverse complications and the possibility of causing death. Abbott’s development pipeline now relies on its line of Hepatitis drugs.

Bardoxolene methyl was meant to improve the function of damaged kidneys, and a hit in this market would be a multi-billion dollar opportunity to serve millions of people with chronic kidney disease.

This setback makes Abbott’s planned spin-off pharmaceuticals business, AbbVie, less attractive. Sanford C. Bernstein analyst Derrick Sung wrote, “This is obviously disappointing news for Abbott as investor excitement around Abbott’s late stage pipeline had been growing in anticipation of the split off of the AbbVie branded pharmaceuticals business.”

Oddly, this bad news has not stopped Abbott from going forward. The spin-off of AbbVie seems to be going through by the beginning of 2013, and the firm has already sold debt to partially fund this split.

Merck Profit Rises Above Estimates

Merck (NYSE: MRK), another leader in the pharmaceutical industry, has released excellent results for profits in the third quarter, beating analyst estimates. The star of its product line up was diabetes drug Januvia, which has allowed the company to recover from the higher sales of competing drug companies. Generic drugs sales have gone up, which has somewhat dampened the company’s profit margins.

Merck earnings were reported at $0.95 per share, two cents more than analyst predictions. Merck’s net income rose to $1.73 billion, about two percent more than $1.69 billion last year. Sales are down $11.5 billion, roughly four percent. Merck has been working on cost cutting and boosting demand of its products in order to stave off competition from cheaper generic brands.

Merck has also gained revenue from emerging markets, such as China, where sales are up. These sales account for about a fifth of the revenue that Merck gets from its pharmaceutical sales.

Major Pharmaceutical Valuations

Of the drug makers making these headlines, the one which was slighted is also the cheapest:

Ticker

Company

P/E

P/S

EPS growth next 5 years

ABT

Abbott Laboratories

15.45

2.53

8.63%

PFE

Pfizer

19.33

2.97

2.42%

MRK

Merck

19.93

2.79

4.03%

JNJ

Johnson & Johnson

22.91

2.91

6.45%

The combined firm that is now Abbott Laboratories will see more competition in the arthritis treatment market, but it is still viewed as a favorite for growth by analysts, while trading at lower price multiples than other newsworthy firms from this industry. Once the pharmaceuticals business is split-off, the remainder of Abbott Laboratories will not have to deal with these legacy issues.

The other firms on this list, Pfizer, Merck, and Johnson & Johnson, are trading at rich price-to-earnings multiples while analysts fear lower earnings growth than the growth expected for Abbott Laboratories. Thus, they are less attractive investments in this space. Their roughly 25% price premiums to Abbott’s earnings multiple is not sufficiently justified by recent news.

Conclusion

Investors should consider Abbott Laboratories as a buy candidate only since its spin-off AbbVie seems likely. Avoid the other stocks considered here until their price multiples become smaller.

Interested in Additional Analysis?

For nearly 100 years, Merck’s cutting-edge research has led to a number of medical breakthroughs. Today, however, this pharma stalwart is staring down a steep patent cliff and facing generic competition for its top-selling drug. Will Merck crumble under its own weight, or will it continue to pay dividends to investors for another century? To find out if this pharma giant has the stamina to keep its Bunsen burners alight, grab your copy of The Motley Fool’s brand new premium research report today. Senior Biotech Analyst Brian Orelli, Ph.D. walks you through both the opportunities and threats facing Merck, and the report comes with a full 12 months of updates. Claim your copy now by clicking here.


BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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