Pharm Camp

I went back to the doctor
To get another shrink
I sit and tell him 'bout my weekend
But he never betrays what he thinks
--The Who

Like Mr Practical, I think risk is high and that cash is a very attractive asset class in this environ (an environ that may persist for quite some time). There is one stock market group that has caught my attention: Big Pharma. As a group, they've largely gone nowhere for a few years--prolly w/ good reason as patents expire and pipelines shrink. Plus there's political uncertainty in front of a presidential campaign where health care & and 'big bad business' will be a major stump for some candidates.

Offsetting that is the favorable long term demographic of aging boomers. Plus the nice cash position of many.

Prof Adami recently reviewed the fundies at Pfizer (PFE) and, like him, I dig the overall picture. I'm attracted to the near 6% yield and the $20+ billion cash hoard after the company peeled off its consumer biz to Johnson & Johnson (JNJ). The stock price has been leaking for years-- primary concerns are 2011 patent expiry on mega blockbuster Lipitor and a thinning pipeline.

At PFE's current market cap of about $135 billion, my EVA/discounted cash flow work suggests that the stock, while not massively undervalued, is decently priced if you believe that the company can average 5-7% sales growth without big margin declines or huge increases in invested capital.

Indeed, in the universe of larger cap stocks that I follow, PFE is one of the few that I can find remotely close to fair value from a DCF point of view.

Others in the drug sector have recently come under pressure. I love the JNJ franchise but not the stock price. Every few years, though, something usually happens to cause Mr Market to serve up a nice price for JNJ.

Mr Market may have done just that a couple years back with Merck (MRK). In Fall 2005, the company was selling for about $70 billion and a 5%+ yield in the midst of legal issues surrounding Viox and a shrinking pipeline. I clearly missed that one (at the time, I thought it could actually go lower). Now, MRK is once again under distribution over legal concerns about Vytorin--a compound successfully developed and marketed with Schering Plough (SGP). Technicals are starting to suggest to me that MRK may have a date with the low $40s.

As bearish as I am, I'm attracted to the prospects of owning a few pharma companies that offer a strong payout as a margin of error (particulary if interest rates continue heading south). If/when dividend yields of JNJ and MRK approach 4% or better, I'll be looking hard at these names as long term investments (not trades). Until then, am willing to wait on Mr Market.

position in PFE