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Big Values In Big Pharma
With European debt woes and the struggling U.S. economy still weighing on the markets, equities have sold off hard, over the last few months. Each piece of good or bad news seems to send the markets into a tizzy, rising and falling respectively. For investors, finding bargains among the wreckage can seem like a daunting task. However, for those who are willing to do some digging, opportunities abound. One such opportunity could be in the Big Pharmaceuticals. Health care reforms, patent cliffs and the recent market rout have taken the wind out of the sectors sails over the last few years. Nevertheless, the sector is finally trading at super cheap metrics and could represent a great income play for starved portfolios.
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Cheap Values in Pills
As the world's population continues to grow and age, health care has quickly become a popular long term theme for investors. With trillions already spent globally on health solutions, the market place is set to expand rapidly, as developed markets see their populations continue to age and emerging nations continue their expansion. Overall, health care costs have eclipsed inflation rates since the early 1990s.
For many investors, the way to play this trend of has been to focus on the technology side of health care. Biotech firms, such as Onyx Pharmaceuticals (Nasdaq:ONXX), or medical device-focused funds, like the iShares Dow Jones US Medical Devices (NYSE:IHI), have become the go-to plays on the sector. After all, with a variety of analyst's calling for the "Age of the Blockbuster" to be over, investors have moved past the stodgy image of the large Pharmaceuticals, in favor of the high growth awarded by biotechs. However, investors may not want to give up on Big Pharma just yet. The industry is transforming its drug pipelines and ultimately paving the way for their survival. Instead of just dealing with generic drug competition, many have expanded their efforts into this area.
In 2010, Pfizer (NYSE:PFE) purchased a 40% stake in generic drug maker Laboratorio Teuto Brasileiro S.A. and, more recently, cut a deal with generic drug maker Akorn (Nasdaq:AKRX). In addition, those rare-diseased focused biotech firms are in Big Pharma's sights. Replenishing drug pipelines via biotech M&A is becoming common place among the large pharmaceutical firms. (For a quick introduction to biotechnology's place in the market, read A Primer On The Biotech Sector.)
Not only do investors now get generic drug and biotech exposure with the major pharmas, they have an opportunity to buy the sector for quite cheap. Currently, the sector trades for a P/E of 16.5 and offers an average dividend yield of 3.9%, but there are plenty of individual firms that trade for single digit P/E's and higher yields. The majority of the large pharma's include heavy cash balances and low debt-to-equity ratios, giving them plenty of ammunition for future M&A.
Big Pharma Values
For investors looking for values in the health care sector, the major pharmaceuticals could be where it's at. Both the iShares Dow Jones US Pharmaceuticals (NYSE:IHE) and SPDR S&P Pharmaceuticals (NYSE:XPH) can be used as broad proxies for the sector. Both have performed well over the last three years, rising 71 and 85.4%, respectively. For those looking for individual values, opportunities abound.
With a yield north of 3% and a 36% trailing return on equity, British drug maker AstraZeneca (NYSE:AZN) could be a great buy. While the firm has experienced some generic completion for its Nexium drug, it has seen higher sales volumes for its Crestor and Symbicort products. Despite recently raising its full-year earnings forecast, due strong performances in emerging markets, AstraZeneca can still be had for a P/E of less than nine. Similarly, Eli Lilly (NYSE:LLY) trades for a P/E of nearly nine and yields 5.2%.
Forest Laboratories (NYSE:FRX) could be another value in the sector. The firm produces products for the treatment of neurological and cardiovascular disorders and currently is debt-free. Earnings-per-share have grown over 164.9% over the previous 10 years and Forrest can currently be had for a P/E of less than eight.
The Bottom Line
While investors have focused on the high tech subsectors of health care, the major pharmaceutical firms now represent values. Large dividends, strong cash positions and newly reinvented pipelines due to M&A, could make the sector a growth element once again. The previous picks along with Novartis (NYSE:NVS) make ideal selections. (For more on this industry, read Measuring The Medicine Makers.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
Cheap Values in Pills
As the world's population continues to grow and age, health care has quickly become a popular long term theme for investors. With trillions already spent globally on health solutions, the market place is set to expand rapidly, as developed markets see their populations continue to age and emerging nations continue their expansion. Overall, health care costs have eclipsed inflation rates since the early 1990s.
For many investors, the way to play this trend of has been to focus on the technology side of health care. Biotech firms, such as Onyx Pharmaceuticals (Nasdaq:ONXX), or medical device-focused funds, like the iShares Dow Jones US Medical Devices (NYSE:IHI), have become the go-to plays on the sector. After all, with a variety of analyst's calling for the "Age of the Blockbuster" to be over, investors have moved past the stodgy image of the large Pharmaceuticals, in favor of the high growth awarded by biotechs. However, investors may not want to give up on Big Pharma just yet. The industry is transforming its drug pipelines and ultimately paving the way for their survival. Instead of just dealing with generic drug competition, many have expanded their efforts into this area.
In 2010, Pfizer (NYSE:PFE) purchased a 40% stake in generic drug maker Laboratorio Teuto Brasileiro S.A. and, more recently, cut a deal with generic drug maker Akorn (Nasdaq:AKRX). In addition, those rare-diseased focused biotech firms are in Big Pharma's sights. Replenishing drug pipelines via biotech M&A is becoming common place among the large pharmaceutical firms. (For a quick introduction to biotechnology's place in the market, read A Primer On The Biotech Sector.)
Not only do investors now get generic drug and biotech exposure with the major pharmas, they have an opportunity to buy the sector for quite cheap. Currently, the sector trades for a P/E of 16.5 and offers an average dividend yield of 3.9%, but there are plenty of individual firms that trade for single digit P/E's and higher yields. The majority of the large pharma's include heavy cash balances and low debt-to-equity ratios, giving them plenty of ammunition for future M&A.
For investors looking for values in the health care sector, the major pharmaceuticals could be where it's at. Both the iShares Dow Jones US Pharmaceuticals (NYSE:IHE) and SPDR S&P Pharmaceuticals (NYSE:XPH) can be used as broad proxies for the sector. Both have performed well over the last three years, rising 71 and 85.4%, respectively. For those looking for individual values, opportunities abound.
With a yield north of 3% and a 36% trailing return on equity, British drug maker AstraZeneca (NYSE:AZN) could be a great buy. While the firm has experienced some generic completion for its Nexium drug, it has seen higher sales volumes for its Crestor and Symbicort products. Despite recently raising its full-year earnings forecast, due strong performances in emerging markets, AstraZeneca can still be had for a P/E of less than nine. Similarly, Eli Lilly (NYSE:LLY) trades for a P/E of nearly nine and yields 5.2%.
Forest Laboratories (NYSE:FRX) could be another value in the sector. The firm produces products for the treatment of neurological and cardiovascular disorders and currently is debt-free. Earnings-per-share have grown over 164.9% over the previous 10 years and Forrest can currently be had for a P/E of less than eight.
The Bottom Line
While investors have focused on the high tech subsectors of health care, the major pharmaceutical firms now represent values. Large dividends, strong cash positions and newly reinvented pipelines due to M&A, could make the sector a growth element once again. The previous picks along with Novartis (NYSE:NVS) make ideal selections. (For more on this industry, read Measuring The Medicine Makers.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.
by
Aaron Levitt
Aaron Levitt is a SABEW investment journalist and analyst living in State College, Pennsylvania. His work appears in several high profile publications in both print and on the web. Aaron is a graduate of The Pennsylvania State University where he studied Economics and International Business and he is an advocate for long-term investing with a global framework. You can follow his picks and pans at @AaronLevitt
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