2 Healthcare Firms To Consider Buying

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

The fiscal cliff is not the only "cliff" to be behind many investors. Healthcare investors could have told you in 2012 that the "patent cliff" was, and probably more, worrisome. But now that both cliffs are largely behind us, investors can start to focus more on the upside catalysts. This article attempts to look at the positive factors behind two large pharmaceutical manufacturers.

A Look At Abbott (NYSE: ABT) & Its Spinoff

Founded in 1888, Abbott is one of the oldest healthcare companies in the world. It operates in more than 130 countries, has more than $35 billion in annual revenue, and around 91,000 employees. Abbott a global leader in Dx solutions, such as blood screening.

It is an attractive company to invest in owing to the fact that it provides consistent income streams and revenues. Moreover, the company has a history of increasing dividend distribution. Even in hard economic times, the company is not likely to experience huge drops in free cash flow adjusting for patent cliffs. The reason is because healthcare is a basic need and households will mostly cut down on other luxury expenses to meet healthcare needs. If R&D fails to deliver, Abbott has $11 billion that it can use to acquire relevant drugs that complement its core portfolio and existing customer base. 

AbbVie (NYSE: ABBV), the pharmaceutical spin-off from Abbott, has joined the S&P 500. The huge investment in research and development is a sign of management's confidence that there will be other products in the future that will lead to a steep growth curve. The company is researching a possible hepatitis C treatment, and it recently reported progress with 99% of patients in a 571-member study being cured of hepatitis C. If they succeed, the market potential is significant with 180 million people suffering from hepatitis. That said, there is significant competition coming from Gilead, which cured 78% of hepatitis C patients with genotype 2 or 3, called "sofosbuvir".

Why You Should Stay Optimistic On Lilly (NYSE: LLY)

Lilly is also a pharmaceutical company. The company said that it was expecting earnings to increase from $3.75 to $3.90 per share in 2013. They also forecast that their 2013 revenue will be between $22.6 billion and $23.4 billion. The huge increase in revenue is expected to arise from the sale of its diabetes and cancer drugs in the markets that are currently coming up in China and the ones that are expanding in Japan. However, financial analysts expect a Lilly’s 2013 revenue to reach only $ 22.8 billion. 

Lilly has been facing stiff competition from other generic drugs for treating schizophrenia. Fortunately, Lilly is planning to release some 13 drugs, which are in their last clinical stages Lilly is also planning to start the third phase of testing solanezumab, a drug for treating Alzheimer’s disease, despite the poor fate of drugs with similar science in beta amyloid. Elsewhere, Lilly and Boehringer Ingelheim are to begin selling Linagliptin, a new diabetes drug in India. Lilly will also join forces with Strides Arcolab from India to supply cancer generic drugs to new markets especially china. There is also news of Lilly’s partnership with Novast Laboratories, which is based in China, to supply generic drugs.

Lilly trades at 14.4x past earnings and has been on a fantastic ride that has sent it soaring 43.4% to its 52-week high. The dividend yield currently stands at a healthy 3.7%, but analysts are largely on the fence. 9 of 15 reporting analysts rate the stock a "hold" or worse. But return on invested capital is still approximately double the sector average and complemented by superior profit margins. I thus encourage buying shares to capitalize off of positive surprise earnings under the expectation that the pipeline momentum exceeds analyst expectations.


TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.

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