The Little Guys Are Pharma’s New Stars

Earlier this week, we wondered if the glory years of the pharmaceutical industry are behind it.

After all, the big drugmakers have been pummeled recently by patent losses, global competition and little in the way of potential blockbusters to show for their enormous R&D spending. As a result, Big Pharma has pared its workforce in record numbers during the past year, with front-line sales representatives suffering some of the biggest job losses.

Some industry experts think investors should avoid health-care companies for the immediate future — or until the clouds hovering over the industry begin to clear. Of course, you need to keep in mind the definition of an expert: someone who knows how to make love 37 different ways but doesn’t have a girlfriend!

Granted, industry profits might not be as high as they once were. But health care is still around a $900 billion worldwide market, and the companies that serve it have little chance of their products becoming obsolete, à la Eastman Kodak (NYSE:EK). Let’s face it: No matter how many Maseratis a person owns, he’s dirt poor if his health is lousy. And given an aging population in most Western countries and growing demand in new economic powers such as China, the need for products and services that prolong life and improve quality of life are certain to grow.

Investors are just going to have to be discriminating. Some analysts think the fastest-growing companies will be the small and midsize outfits that have sprung up in the past few years.

Gilead Sciences (NASDAQ:GILD) is one of the companies in that category that appears to have plenty of upside. The Foster City (Calif.) biotech, with a market cap of $35 billion, was already a leader in HIV therapy when it made a big move in November, acquiring coveted hepatitis C expertise by paying $11 billion for Pharmasset (NASDAQ:VRUS).

Gilead’s stock has recovered nicely after sliding 10% on the buyout news — it’s up more than 30% since then. One former pharmaceutical executive told this reporter that he believes the company is the best-managed in the entire industry — by far.

Cubist Pharmaceuticals (NASDAQ:CBST) is another stock that has rekindled investor enthusiasm. The biotech is still quite a long way from its all-time high of $66, but CEO Michael Bonney has the company headed in the right direction. Its shares have climbed 37% since the beginning of August on the strength of new agreements with Teva that protect its franchise antibiotic and key moneymaker, Cubicin. For 2011, the company reported Cubicin sales of $735 million, up 18% from a year earlier. To beef up its product portfolio, Cubist forked over $190 million in cash deal late last year to buy Adolor Corp. In doing so, it added a drug with $100 million in sales potential as well as an experimental compound that could eventually compete in a multibillion-dollar market.

With Treasury yields at historic lows, investors looking for a relatively safe return on their capital shouldn’t overlook Big Pharma, despite its woes, since these companies offer some of the highest dividend yields available. These include Sanofi (NYSE:SNY), 3.70%; Merck (NYSE:MRK), 4.4%; Johnson & Johnson (NYSE:JNJ); 3.5%, Lilly (NYSE:LLY), 4.9% and Pfizer (NYSE:PFE), 4%.

As of this writing, the author is long GLD, MRK, PFE, LLY, JNJ.

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