You might not be aware of it, but big pharma stocks have gone through a difficult period for many years. A lot of the big drugs at the big pharma stocks went off patent, and the revenue for some of the big pharma stocks has fallen off as a result.
Some of the big pharma stocks were able to replace that revenue and some weren’t. The result is that many of the pharmaceutical stocks pay nice dividends but haven’t grown much at all over the years.
I’ve been bearish on the pharmaceutical stocks for quite some time, but some of them have started to turn the corner and some interesting plays have emerged once again. These are the three I think have the best futures.
Teva Pharmaceutical Has a Better Future Ahead
Source: Open Grid Scheduler (Modified)
You might be surprised to hear me suggest Teva Pharmaceutical Industries (NYSE: TEVA) as a buy. I’m not going to misrepresent the situation over there; the company has seen much better days. It took on an enormous amount of debt to make an illadvised acquisition. The good news is that things seem to have stabilized at TEVA.
The first-quarter earnings report was good, with both earnings and revenue beating estimates. However, debt is over $30 billion and that is a problem, as well as a large year-over-year decline in its flagship Copaxone drug sales. Generic competition is only going to increase.
However, I like deep value plays. I like to buy when everyone else is selling. And you know who else is buying with me? Warren Buffett. Berkshire Hathaway Inc. (NYSE:BRK-B) more than doubled its position in TEVA this past quarter, to more than 40 million shares.
I’m not saying that Warren Buffett can’t make mistakes, but I think he sees the same value here that I do. I would open a small position near $20, and look to add in nibbles should the stock fall into the teens. Just be aware that this is going to be a very long-term position before it bears major fruit.
Biogen Is a Pharma Stock with a Next-Level Development Plan
Source: Biogen via YouTube
My other choice is perhaps more of a biotechnology stock than big pharma, but call it what you will, Biogen Inc. (NASDAQ:BIIB) not only has established a beachhead with numerous drugs, it’s going to be a leader in biosimilar technology. I’m betting on the future when it comes to big pharma and that means betting on biosimilars.
Biosimilars are essentially copies of biologic drugs that are manufactured by a competitor, who created the original innovative drug itself. Biologics tend to have very complex molecular structures, so any change in manufacturing could change the molecule.
Although competitors don’t have access to the specifics of the original molecular structure, they do have samples of the product itself. When the original patent expires a competitor may attempt to create a biosimilar by essentially using reverse engineering.
It is still an emerging area, and the FDA is not quite gotten comfortable with it, but it will. With BIIB, there will be a tension with its own origination business, as resources need to be allocated to both the branded drugs and biosimilars, but there’s enough expertise at Biogen to make this happen.
Pfizer Is Making Moves Now
Speaking of biosimilars, I’m cautiously bullish on Pfizer Inc. (NYSE:PFE). The FDA approved a biosimilar of Amgen Inc’s. (NASDAQ:AMGN) Epogen and Johnson & Johnson’s (NYSE:JNJ) Procrit called Retacrit.
Alas, forward earnings growth is only pegged at just 7% annualized over the next five years. However, Pfizer is a cash flow monster, generating free cash flow in the mid-teen billions every year. It pays out roughly half of that as a dividend.
All of this free cash flow, plus a biosimilar approval of a major therapeutic drug, may be the beginning of Pfizer getting back on track.
As I said, I’m a deep value kind of guy. I can honestly say that Pfizer is presently trading at a very deep value, but I do think it’s possible it will begin to shake off years of stagnation going forward.
A FAREWELL NOTE: I want to thank all my Investorplace.com readers. I’ve been privileged to write more than 1,700 articles for this extraordinary publication over the past seven years. I’m moving on to focus more on my investment advisory newsletter, raising and placing capital for businesses and high net worth individuals, and non-finance related activities. You can reach me at TheLibertyPortfolio@gmail.com, and a soon-to-be-relaunched www.IchabodsCranium.com.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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