Buy This BioPharma Stock, Avoid This One

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

When valuing BioPharma, it's the pipeline that matters. Especially in this environment of patent losses galore, investors need to go after stocks whose catalysts are being unreasonably overshadowed by current events that bear no influence on the long-term future. Those are the companies worth backing.

Amgen's (NASDAQ: AMGN) Pipeline Speaks Volumes

Amgen, in particular, is making solid progress in it R&D portfolio. The company is beginning a Phase II study on a sclerostin antibody for osteoporosis. Through its PCSK9 antibody, it is also targeting products that capitalize on the growing anti-obesity market. This candidate is producing solid Phase II data in helping patients manage LDL cholesterol levels to an optimal range.

I am further optimistic about the company's partnership with AstraZeneca (NYSE: AZN) in addressing the inflammation market. British drug developer AstraZeneca comes equipped with $9.3 billion in cash, which will allow Amgen to save more of its finances for subsequent R&D. Meanwhile, existing products like Sensipar, Vectibix, and Nplate have taken off like rockets, with 58% growth realized in 1Q 2012.

Whether it's buying out businesses in Turkey or buying out a cancer treatment company, management is targeting emerging economies and high-return markets. This will help Amgen complete its $10 billion share repurchase program, which represents nearly 15% of the current market cap.

Johnson & Johnson (NYSE: JNJ) Overvalued

I foresee J&J underperforming its peers over the near and long-term for several reasons. First, it's multiple of 23.6x past earnings is simply too high in light of forecasts for only 6.5% 5-year annual EPS growth. While 3Q 2012 EPS of $1.25 and top-line year over year drug growth of 14.5% were impressive, Europe continued to provide a headwind.

Furthermore, I do not like the company's "overdiversification", which is dragging down strong traction in certain segments. For example, the consumer business has fallen 4.3% in 3Q 2012 and overclouded (1) domestic growth in pharmaceuticals and (2) the integration of Synthes increasing sales in medical devices. The latter contributed 5.8% global operational sales growth.

SG&A expenses of 30.6% sales fell 210 bps as cost cutting initiatives started to pay off, but domestic business was still down 0.4%. International sales grew only 1.8% due to poor consumer good demand, which is enough of a headwind to consider selling it or spinning it off from the pharmaceutical segment. I wouldn't hold your breath that management will take this step within the next 2 years, so backing the stock now is little more than forgoing more attractive returns elsewhere.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of AstraZeneca plc (ADR) and 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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