Why These 2 BioPharma Stocks Are "Buys"

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

In my view, healthcare continues to be one of the most undervalued sectors right now. Investors have been singularly focused on patent cliffs and fail to recall the R&D powerhouses fueling pipeline. Below, I look at some of the innovation and strategy behind biotech companies. Analysts have low earnings expectations for both companies, so let's see if there is any upside from this negativity.

Buy Abbott (NYSE: ABT) Or its Pharma Spin-off?

Abbott is a leading company in the field of medical devices, diagnostic techniques, nutrition products, and pharmaceuticals. The company split into two in early 2013. One of the companies is known as Abbott Labs and the other is known as AbbVie (NYSE: ABBV). Abbott Labs will continue to offer different medical products while AbbVie will be focused mainly on pharmaceuticals. The split was widely praised by the market and analysts by giving investors the ability to better diversify risk.

There is, for example, concern that AbbVie is overly dependent on the drug Humira. The drug is expected to lose exclusive protection in the U.S. and in Europe in 2016 and mid-2017 respectively. The concern is that the company fails to have other blockbuster drugs to make up for growth erosion from existing products. AbbVie is also facing considerable competition. AbbVie generates revenues worth $18 billion, and 70% of its profits are dependent on Humira.

To get a sense of the the "new" Abbott, consider some of its recent news. For example, the company recently launched an FDA-approved drug-eluting coronary stent, called XIENCE Xpedition, that slowly ejects medicine. The company also is developing a blood test that may be able to cut the time needed to diagnose a heart attack by as much as several hours. Management's commitment to raising dividends also strengthens my outlook on the firm, especially in the context of rising skepticism on AbbVie.

Which one is preferable really depends on your risk tolerance. AbbVie trades at 12.2x forward earnings while Abbott trades at 14.4x forward earnings. On the other hand, Abbott contributes significant free cash flow, as evidenced by the 8.5% yield. I would prefer going with Abbott, since I believe the difference between the company's forward multiple and that of AbbVie is not wide enough. Abbott is considerably safer and had strong double-digit EPS growth over the past five years.

Why You Should Buy Lilly (NYSE: LLY)

As the tenth largest pharmaceutical company in the world, Lilly carries a larger economic weight than what many in the market recognize. In addition to offering a generous 3.7% dividend, the company also started a share repurchase program worth $1.5 billion through 2012. In 2013, the company has set its goal on broadening the existing portfolio of products by utilizing global labs as well as collaborating with other organizations with similar interests. 

In January 2011, Lilly and Boehringer Ingelheim entered into an agreement to work together in finding alternative treatments to diabetes in what has been regarded as among the biggest collaborations in the industry. The project targets the 371 million people who are globally affected by diabetes. In early January 2013, the companies announced positive results of some four clinical tests of a Phase III test on empagliflozin, which treats type 2 diabetes. Lilly has also announced that it is going to donate $100,000 towards scholarships for children with type 1 diabetes. This is the second time that Lilly is donating such funds. As evidenced by political scrutiny over Gilead's STD drugs, strong public relations are important.

Lilly expects revenues in 2013 to amount to between $22.6 billion and $23.4 billion. Due to efforts to cut costs and increase productivity, 2013’s expenses are expected to be less than those of 2012. R&D is expected to cost $5.2 biliion to $5.5 billion.

At a respective 14.6x and 14.2x past and forward earnings, Lilly is reasonably priced. It grew by 10% annually over the past five years and is doing what it can to stem earnings erosion. With $6.9 billion in cash, the company should consider acquiring other business and creating value in the process. In this market, Lilly should make use of its cash and take advantage of the market's myopic focus on patent cliffs.


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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