The exploding U.S. budget deficit, unrest spreading throughout the Arab countries, battles in Iran, Afghanistan and Libya, spiraling oil prices — will these factors make defensive stocks attractive to investors? If so, some of the best opportunities may be found among Big Pharma, once the darling of the skittish.
It’s well known among industry followers that Big Pharma has been down and out for the past decade. That’s reflected by the share performance of some of the biggest drug makers in the world during this period. The laggards have been lead by, Merck (NYSE:MRK), Bristol-Myers Squibb (NYSE:BMY), Pfizer (NYSE:PFE) and Lilly (NYSE:LLY), all down about 60% during that period.
Just to illustrate how shareholders in these companies have suffered, consider that a $1,000 investment in Bristol-Myers 10 years ago would be worth about $375 today. Adjusted for inflation, the loss is even greater – a whopping 70%.
In the past two years, however, Merck, Bristol-Myers and Pfizer have shown signs of coming off life support, while Lilly has continued its struggles.
Another member of the club and a former investment community darling, Abbott Labs (NYSE:ABT) has also failed to join the Big Pharma upswing in any substantial way. It is trading at around $50, up from two years ago but off its high of $55.49 in January 2010.
Despite the company’s rather tepid performance, Abbott Chairman and CEO Miles White was recently named by Barron’s as one of the 30 Most Respected CEOs for the third consecutive year.
Respected, maybe. Productive for shareholders, no. There’s another reason for investors might want to take this honor with a grain of salt: Two years ago, the same publication wrote a glowing article about Abbott, suggesting its shares could see a 40% gain during the next 18 months. Ouch!
Perhaps, however, the Barron’s prediction wasn’t off base, just somewhat premature. Abbott may be on the brink of breaking out. The company said it will earn between will earn between $4.54 and $4.64 a share in 2011. Based on its current price-to-earnings ratio of 16.6, that translates into a target price of about $75, a nice move up from its current price.
Although the company generates about 60% of its revenue from pharmaceuticals, Abbott has substantial nutritional and diagnostics businesses that help insulate it from some of the issues facing pure pharmaceutical companies, including expiring patents and generics.
Abbott also boasts one of the top selling drugs in the world, Humira, for treating inflammatory conditions affecting the joints, spine, and digestive tract. In 2010, worldwide sales of this blockbuster were more than $6.5 billion, up nearly 20% from a year earlier. Just as encouraging, the drug retains patent protection until 2016. Another potential blockbuster could be waiting in the wings, the cardiovascular drug Tripilix.
The company’s pipeline appears to be pretty well-stocked, too. Abbott has 350 clinical trials underway and says it will deliver more than 75 new products or indications over the next five years. Investors also get the benefit of a dividend that yields a respectable 4%. Moreover, the payout is something they can count on: the company has paid 348 consecutive dividends since 1924.
It certainly appears that Abbott bears a hard look.
