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Tickers in this Article: PFE, MRK, JNJ, WYE, BVF
In days past, pharmaceutical companies were the bluest of blue chips, renowned for their high return on equity and persistent revenue and earnings growth. An investor who purchased shares of Pfizer (PFE), Merck (MRK), Johnson & Johnson (JNJ), or Wyeth (WYE) in 1986 and held through the present would have easily outpaced the S&P 500.

But that was then and this is now. More contemporary purchases would have disappointed. Indeed, Pfizer shares purchased five years ago and held through the present would be underwater and would have fallen far short of the S&P 500.

Industry dynamics have changed, to be sure: health care providers are aggressively pushing generic alternatives and blockbuster drugs are fewer and far in between. Girth is another mitigating factor. The three largest American drug companies – Pfizer, Johnson & Johnson, and Merck – posted total 2005 revenues of $125 billion, meaning blockbuster drugs have to bust even larger blocks to impact the income statement.

The pharmaceutical industry is still a growth industry and will remain one into the foreseeable future for the simple, well-documented reason the aging baby-boomer demographic is an exemplar of poor fitness and lousy eating habits; hence, their reliance on pharmaceuticals will only increase in coming years.

To capture a meaningful percentage of this growth, investors should look beyond the behemoths to the smaller confreres. On this front, I like Biovail (BVF), a billion dollar, Canada-based pharmaceutical best known for its antidepressant Wellbutrin and herpes treatment Zovirax.

Biovail has performed admirably through 2006. In the second quarter, the company reported net income of $80.6 million, or 50 cents a share, up from $3.7 million, or 2 cents a share, for the year-ago period. What's more, the company recently backed its 2006 earnings per share target of $2.30 to $2.40. Based on these projections, Biovail sports a paltry forward price-to-earnings ratio of 6.50.

Cash generation is another attribute. At the end of 2005, Biovail had cash and cash equivalents of $445 million, up from $34.3 million a year earlier, giving it an unheard of quick ratio of nearly three.

Given Biovail's stellar financial performance and amble liquidity, why, then, is its stock trading at a 47% discount to its 52-week high? In short, uncertainty over Wellbutrin, which accounts for 38% of sales.

Biovail suffered a major setback in August when a U.S. District Court ruled that Anchen Pharmaceuticals' generic version of Wellbutrin did not infringe on Biovail's patents. A subsequent setback was suffered in September when Biovail's request for a temporary restraining order and preliminary injunction against the FDA to prevent it from granting market approval of generic versions of Wellbutrin was rejected, essentially clearing the path for Anchen to enter the market.

I believe investor reaction to both rulings is overdone. Yes, the competition will hinder Wellbutrin revenue growth – perhaps even stall it – but it won't eliminate its contribution to the top line. Moreover, Biovail is no one-trick pony. During 2005, the company received six new product approvals to treat such ubiquitous maladies as pain, diabetes, depression, and insomnia. Growth in Zovirax and Ultram, a pain reliever manufactured for Johnson & Johnson, should continue unabated.

Given its copious cash account, its 3.4% dividend yield, its low P/E ratio and stock price, investor antipathy, and growth potential, Biovail presents a compelling investment for patient, sanguine investors.

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