BioPharma Stocks that You Ought to Buy

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

As big BioPharma advances through a series of patent cliffs, investors will be eyeing those that showcase promise in the pipeline. In my view, Pfizer (NYSE: PFE) has one of the most undervalued pipelines on the Street. Following the exclusivity loss of Lipitor, investors are rightfully looking for the next big blockbuster product. According to analysts MKM Partners, it deserves a 5% discount to peers; yet, the stock is at around a 15% discount.

A lot of Pfizer’s promise comes from two areas: cost cutting and developing its new drugs Tofacitinib and Eliquis.  Following the loss of exclusivity for Lipitor, Pfizer is in strong need of improving the bottom line for the next round of drugs that are produced. By setting the foundation for high margins when Tofacitinib and Eliquis are launched on the market, Pfizer is positioned for strong upside during this next phase of business.

Cost cutting has come from laying off tens of thousands of employees, and upwards of $2.7 billion in SG&A savings is expected to be realized in 2012 alone. This has gone so successfully that earnings will likely be flat instead of downward sloping, as anticipated.

The company is also a strong defensive play that the market has failed to appreciate. If utilities are able to trade at high multiples due to their generous dividends, why can't Pfizer do the same? In my view, investors are being myopic if they believe that this slump will last into perpetuity. BioPharma companies go through a series of ups and downs, but if you are a large player like Pfizer, you have the leverage to create a catalyst and produce a greater amount of ups. In addition, Pfizer's size grants it protection from earnings cliffs.

Going forward, there are multiple catalysts in the company’s pipeline that could unlock shareholder value. Tofacitinib for arthritis and Eliquis for cardiovascular issues target competitive markets that still have plent of unmet demand. Xiaflex’s Phase 3 data for Peyronie's, and Bosutinib’s efficacy data for leukemia also have yet to be appreciated by the market.

As much as I find Pfizer to be an attractive investment, I always encourage diversification. Biotech firms like ImmunoCellular, for example, have been able to generate strong returns by targeting highly unmet needs. In ImmunoCellular's case, it focuses on the glioblastoma market. Glioblastoma is one of the most deadly forms of cancer, and no solutions except ImmunoCellular's ICT-107 have shown much promise. ICT-107 has been proven to increase overall survival by 80% after 2 years, compared to 26.5% for standard care. This breakthrough will likely generate strong returns after each clinical trial is passed.  .

But don’t forget to back larger BioPharma plays too. Eli Lilly (NYSE: LLY), with a stellar 4.2% dividend yield, is cheap at less than 13x past earnings. With analysts projecting EPS to fall by 8.2% over the next 5 years, the bar has been set very low for high risk-adjusted returns. After beating expectations in all of the last three quarters, Lilly deserves to see analyst EPS forecasts upped more. While Pointbreak, Eli Lilly’s lung cancer drug, did not pass its Phase III trial, it was able to improve survival rates of patients treated with another drug, Alimta. Accordingly, now is an attractive entry point to buy.

TakeoverAnalyst 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.

blog comments powered by Disqus