A Winning List of Biotech Companies
List of Biotech Companies
With many analysts expressing interest regarding how 2011 is and will continue to be labeled as the year of the takeover….We give you a list of biotech companies that may be suitable to fit that bill from a suitor perspective and due to the deep, rich pockets that these conglomerates have under their belt within that space. While always looking to leapfrog over one another, Mergers and Acquisitions are the number one clear cut way to become the leader in the industry from a growth standpoint.
Surfacing on the horizon over the mid-term, there are several coming patent expirations on key drugs and the development and marketing of products now in the pharmaceutical industry’s pipeline could alter company revenue and profits significantly in coming years. As a result, drug stock investors are focused not only on this year’s earnings but also on those in the distant future.
From a longer-term outlook, Tim Anderson, an industry analyst at Sanford Berstein, recently projected 2015 and 2020 profits for nine major U.S. and European drug companies in a report titled “The Long View: Is There Light at the End of the Pharmaceutical “Patent Cliff’ Tunnel?” Few analysts in any industry make such long-term projections. A winning list of biotech companies which have prescriptions for profiting comes down to earnings growth.
Anderson’s conclusion, based on admittedly subjective assumptions about new drug revenue, is that Glaxo-SmithKline (NYSE:GSK), Novartis (NYSE:NVS), Pfizer (NYSE:PFE), Merck (NYSE:MRK), Sanofi-Aventis (NYSE:SNY) and Roche Holdings (OtherOTC:RHHBY) are best positioned long-term, while Eli Lilly NYSE:(LLY), Bristol-Myers Squibb (NYSE:BMY) and AstraZeneca (NYSE:AZN) have a weaker outlook.
Working hand in hand, the firms likely to have the biggest earnings gains also could be stock-market winners, while those with disappointing profits might be losers. Anderson is most bullish on Novartis, Merck and Pfizer and favorable toward Glaxo, although he rates it Market Perform.
There isn’t much variation in the price/earnings ratios of major drug stocks, based on the 2011 profits. That means investors can buy companies with sharply rising earnings at only a modest premium to those whose earnings are likely to decline. The six would-be winners, Glaxo-SmithKline, Novartis, Pfizer, Merck, Sanofi-Aventis and Roche Holdings, generally have lower price/earnings ratios than the losers, Eli Lilly, Bristol-Myers Squibb and AstraZeneca, based on projected 2015 profits. All the winners have lower P/Es, based on Anderson’s 2020 estimates.
“AstraZeneca and Lilly are in a tough place in the next few years” owing to large revenue losses from expiring patents of important drugs, Anderson says. “Novartis and Glaxo are two of the best-looking companies, and they are among the diversified.”
Novartis, whose U.S.-listed shares trade around 61, may post a 2020 profit of $7.67 a share, up from $5.50 in 2011, while Glaxo, whose stock fetches about 43, could generate earnings of $6 a share in 2020, up from the $3.70 estimated for this year.
A key industry problem-and the reason for depressed P/Es throughout the sector-is that the revenue potential of new drugs isn’t expected to match current sales of Lipitor and other blockbusters set to lose patent protection in coming years. After such protection is lost, revenue from a drug can quickly drop by 75% or more, as patients switch to cheaper generic products.
Despite $60 billion in research and development spending last year among the nine companies listed, the Food and Drug Administration has been approving only about 20 new drugs a year.
A “sure-fire” attraction for investors to find a winning list of biotech companies is to locate drug-company dividends; stocks yielding a figure of 4%, on average.
Anderson favors Novartis and Glaxo, in part because of their sizeable nonbranded drug-operations. Novartis owns Alcon, the eye-care giant, and controls Sandoz, the world’s No. 2 generic-drug maker, behind Teva Pharmaceutical Industries (NasdaqGS:TEVA). This should help Novartis, as more complex drugs known as biologics become subject to generic competition.
Glaxo has a large consumer-products franchise, including Tums, Polident, Aquafresh and Nicorette gum, that kicks in about 20% of revenue. It is also one of three leading vaccine makers, along with Merck and Sanofi. Vaccines offer an annuity-like business model because generic competition is virtually nil due to the difficulty of gaining regulatory approvals.
Pfizer is the industry’s main restructuring play as the company weighs sales or spinoffs of its consumer-products and animal-health businesses. Some have speculated that it might even spinoff a portfolio of drugs, including Lipitor; that face looming patent expiration. Exiting from this so-called established-products business would reduce revenue by 50%, to $35 billion to $40 billion, giving new products, such as a treatment for rheumatoid arthritis, a bigger financial impact.
Pfizer was the industry’s most out-of-favor stock less than a year ago, but it since has rallied 40%, to a recent 20.60, as investors have grown more confident that the company can weather a coming string of patent expirations without a profit collapse. Anderson sees upside to 24 if the restructuring plays out and the company has some pipeline success. Merck has been hurt by some pipeline setbacks, but could benefit from its 2009 merger with Schering-Plough and fewer patent expiration than its rivals.
Revenue generating Roche is the world’s top biotech company following its 2009 purchase of Genentech. It is also a leader in diagnostics, including in-vitro procedures. Its P/E ratio has contracted sharply in recent years, despite a still-strong growth outlook. Its U.S.-listed shares fetch 42, or 11 times estimated 2011 profit and eight times estimated 2015 and 2020 profits.
Bristol-Meyers arguably is the industry’s R&D champ. It has shed businesses outside of prescription drugs and aims to create a “string of pearls” involving new drugs. The strategy looks smart, given the likely approval of promising drug for malignant melanoma with more than $1 billion in annual sales potential, and other possible winners. Bristol’s success, however, seems reflected in stock, which trades for 29, or 13 times estimated 2011 profit. Anderson sees no earning growth in the next decade, as patent expirations on products like Plavix (shared with Sanofi) offset the impact of new ones.
Eli Lilly and AstraZeneca face major patent expirations in the next five years. Lilly’s earnings could drop to $3 a share in 2015 and $2 in 2020 from an estimated $4.28 this year. The company’s lush dividend yield of 5% might not be sustainable, long-term.
StockRunway’s List of Biotech Companies Summary:
The bottomline is this…The companies mentioned in this article are cash-cow, revenue generating machines although a few are clearly heading in opposite directions.
Novartis and Glaxo are buffered by non-drug businesses. Roche is a Biotech giant, Pfizer is a promising restructuring play. Merck has fewer patent expirations than it’s rivals and Sanofi is strong in emerging markets.
Once again, making it cut and dry…earnings growth is the best prescription for drug firms. On that note…here is a list of biotech companies shining an array of bright light, Novartis, Glaxo, Roche, Pfizer, Sanofi and Merck all of which should be a fixture when it comes to companies in investors’ medicine cabinets. This is your Captain….Signing off for now, Trade Well and Stay Onboard the StockRunway!
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