Are big pharmaceutical stocks in the midst of a turnaround?
“A turnaround could be at hand,” "Mad Money" host Jim Cramer said. “After years where the prospects for these companies kept deteriorating, they can finally look forward to a future that's brighter than the recent past.”
Investors have steered clear of these stocks because all of the major pharma companies are losing patent protection on their largest products in about a 12-month window. From 2010 to 2014, roughly $90 billion worth of branded drugs are going generic. Nevertheless, Cramer thinks these stocks are starting to rally because “this is as bad as it gets.” Big pharma stocks could continue to go higher, he said, because they are still trading at depressed price-to-earnings multiples with juicy dividend yields.
To play the resurgence in pharma, Cramer is betting on drug companies with potential blockbuster products in the pipeline that could fill the earnings void created by the patent expirations. The following are his preferred plays.
Based in Whitehouse Station, N.J., Merck is currently developing an experimental heart drug for those with good or bad cholesterol levels. Anacetrapib essentially helps lower the “bad cholesterol” while raising “good cholesterol,” thereby reducing the chance of heart disease. Although currently in Phase III development, it could be years before it enters the marketplace. When it finally does hit the market, though, Cramer thinks it could potentially generate up to $10 billion in annual sales for Merck. In the meantime, investors can enjoy a 4.3 percent dividend yield.
In 2010, Merck lost patent protection on two hypertension drugs and will lose protection on an asthma and allergy drug later this year. Cramer thinks it should still be able to deliver steady growth over the next five years, though, thanks to a slate of recently released blockbusters that address everything from diabetes to HIV.
Sanofi is the world’s largest drug company with a stock that sports a 4.8 percent dividend yield. The stock has run up by 16 percent last year, if you had reinvested dividends, but Cramer thinks it could still go higher.
Cramer likes Sanofi because three of its biggest drugs are going generic this year, but the company saw the dangers coming and took steps to make sure it never happens again. He hands it to the company’s management, who he praised for their strategic thinking and leadership.
Going forward, the company is investing in high growth platforms that are protected by more than just a patent, such as vaccines where barriers to entry are high, diabetes and generics. In doing so, the company hopes to build brand loyalty.
Cramer thinks Sanofi is a buy, buy, buy.
Bristol-Myers and Pfizer
Bristol-Myers and Pfizer have been working on a groundbreaking drug called Eliquis, an oral anticoagulant that prevents stroke in patients with atrial fibrillation, which is the most common form of cardiac arrhythmia or irregular heartbeat. It appears to be highly effective and could be a needle mover, too. If approved in March, the drug could generate more than $5 billion in peak sales with the money being divided between the two companies.
Cramer said Eliquis is just one reason to own Bristol-Myers and Pfizer, though. Both stocks sports juicy dividend yields of 4.3 and 4 percent respectively.
Johnson & Johnson.
From recent product recalls to questionable management, Cramer admitted Johnson & Johnson faces many challenges. But its pharmaceutical business is much strong than most people realize, he continued. Its patent expirations are already behind it.
“Going forward, Johnson & Johnson’s newly launched products combined with their pipeline of drugs in late stage development could ultimately add as much as $6 billion to the company’s worldwide sales,” Cramer noted. “That’s enough to move the needle even for a gigantic healthcare behemoth like JNJ. They’re not relying on one particular blockbuster drug, but rather a whole bunch of smaller ones.”
Johnson & Johnson also pays a 3.5 percent dividend yield and has consistently raised its dividend for 49 years.
Biogen, a biotechnology firm, not only has a number of popular products on the market, Cramer noted, it has an excellent pipeline of drugs in development, too. It’s main focus is on treating multiple sclerosis, which is a chronic disease that attacks the central nervous system. There is no cure, but there are a bunch of drugs that aim to prevent relapses and keep the disease in remission.
Biogen currently has two MS treatments on the market, accounting for 60 percent of its total business. More importantly, though, it’s developing a new orally-delivered therapy that could be the most effective treatment yet. Cramer thinks it could make Biogen a fortune. It’s called BG-12 and given it receives FDA approval, it could go to market by the end of the year. The drug could help Biogen rake in $1.5 billion in sales in 2015, which would be impressive given its total revenues in 2011 was $5 billion.
The stock is currently near its highs, but Cramer still thinks it’s a buy because the future looks bright for this biotech company.