Go Wild and Buy these 3 BioPharma Stocks
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
From high dividend yields to inelastic demand, biopharmaceuticals offer ideal risk/reward. In my view, given the patent cliff climate it is best to broadly diversify. Much of the downside, as explained below, has been factored in; but only some catalysts have been accounted in a stock’s price. Below, I review the fundamentals of three promising producers.
Sanofi Still Undervalued...
After gaining 31.3% over the past 52-weeks, Sanofi (NYSE: SNY) may appear like it is about to hit a ceiling. In my view, however, the stock is still meaningfully undervalued. After a terrific 2Q12 profit of $0.95 per share (greater than expectations), management has been able to ease the concern over domestic exclusivity losses on Plavix and Avapro. Like many other biopharmaceutical producers facing patent cliffs, the company is looking to cut costs in order to hedge against the downside. But, unlike many of its competitors, it will also pursue takeover activity to grow scale and spread out fixed costs.
Fortunately, management has a strong track record. The 2011 Genzyme purchase has catalyzed Sanofi’s top-line while adding to its pipeline, which helps to maintain investor excitement. While the company is still rated much more towards a buy than a sell on the Street, analysts have grown more negative of late. Standpoint Research, for example, has downgraded the stock from buy to hold.
All in all, however, the long-term story will most likely exceed the 4.3% annual EPS growth rate forecasted over the next 5 years. While the voluntary recall of Typhim Vi vaccine certainly doesn't bode well for the brand image, the stock still offers a 3.9% dividend yield and 10% less volatility than the broader market. I thus strongly encourage buying Sanofi for favorable risk/reward.
But GSK, Merck Are Even More Attractive
During the same time that Sanofi has taken off like a rocket, GSK (NYSE: GSK) went up only around a third of the amount. But, it still appreciated by 12% in just 52 short weeks, so management has done something right. In fact, GSK recently announced that its new drug application for daily treatments of FF/VI in chronic obstructive pulmonary disease sufferers has been recently FDA-approved. Considering that the stock fell 1.1% last week, this event was under-appreciated by the market.
GSK is cheaper than Sanofi, offers a considerably higher dividend yield, has lower volatility, and is forecasted for even greater growth. The dividend yield is near 5%, and the stock trades at a respective 13.8x and 10.4x past and forward earnings. Besides these solid fundamentals, there are several additional reasons to be optimistic about GSK.
First, the company's decision to acquire Human Genome Sciences indicates management's focus on the long-term as a way to hedge against local patent cliffs. While the firm may lag behind peers in growth, it has top margins and, most importantly, an undervalued pipeline. Developments in the treatment of HIV, respiratory illnesses, and advances in DNA all grant the company larger exposure to reward than to risk.
Merck (NYSE: MRK) similarly has greater upside than downside. Equipped with an excellent balance sheet (the quick ratio is at 1.7x) and a dividend yield of 3.7%, the company is also capable of pursuing accretive takeover activity. After 5 years of flattish earnings, shareholders are likely to jump on any signs of emerging catalysts. UBS recently reiterated its buy rating while upping the price target to $50. I
n addition, the company has also taken the appropriate actions to exploit patent cliffs. By setting up a joint venture agreement with the second largest healthcare firm in the US, Pfizer, Merck can lessen investor anxiety over its own exclusivity losses. At the same time, management is also penetrating the Chinese market by teaming up with Simcere Pharmaceutical Group. This exposure to high-growth emerging markets makes now an attractive time to buy given how overly negative commentators have been about a supposed Asian slowdown.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of GlaxoSmithKline. Motley Fool newsletter services recommend GlaxoSmithKline. 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.