Buying Healthcare Stocks for an Obama Presidency (Part III)
In a previous post, I spelled out why I am buying healthcare stocks for an Obama presidency. In that post, I promised to provide three stocks that would benefit from this fact. The first stock was Aetna (AET) and now I will discus the second stock in this series, Schering-Plough Corporation (SGP).
Schering-Plough (SGP)
Schering-Plough discovers, develops, manufactures, and sells pharmaceuticals worldwide. The company has a joint venture with Merck & Co., Inc. (MRK) for the development and management of two cholesterol-lowering drugs and an allergy/asthma drug.
Political concerns over government price negotiations with pharma companies have pressured the industry’s stock prices over the past year. I feel that this impact will not be as large due to its slowing momentum in Washington and the patent expirations coming in the next 3-7 years. These patent expirations will lower drug costs for consumers and insurance companies devoid of any government plan.
It is apparent that many big pharmaceutical companies are facing numerous blockbuster patent expirations in the next 3-7 years. In my opinion, Schering Plough has the best portfolio and pipeline position within the big-pharma group. Although SGP stock has faced headwinds from a recent ENHANCE panel, which I will discuss, I feel because of their above average portfolio/pipeline SGP will out perform its competitors in the next 12-18 months.
Product Portfolio and Pipeline
Almost every U.S. pharma company will experience sharp blockbuster patent expirations starting in 2011. Add this to a large pipeline shortfall along with the fact that drug development takes a decade and the future becomes very foggy for these firms.
In this fog, one pharma firm stand out, Schering Plough. SGP has the lowest patent exposure in the industry, with only 15% of current revenues exposed to patent expirations in the next 7 years. This relatively low exposure will allow SGP to remain the industry’s top growth firm well into 2012.
click to enlarge images
SGP has its fair share of patent expiration in the next 7 years, these include Zemuron, Puregon(Follistim), Livial, Temodar, Implanon, Noxafil, Depot, Avelox, and Asenapine. But if you look at the expected revenue of SGP’s pipeline compared to the loss of patent exposed revenues, SGP is an industry leader. Its 2015E pipeline revenues exceed its patent exposed revenues by 11.6%.
Given the above information, you can see why I feel SGP has the best pipeline/portfolio mix to weather the coming patent expiration storm.
Concerns over ENHANCE cholesterol findings
The study found that Vytorin, a combination of Merck's Zocor and Schering's Zetia, worked no better than Zocor alone at removing plaque from arteries. This has had the effect of reducing the market share of Vytorin from ~12% to about ~9.0%, where it has stabilized since April. The ENHANCE panel results should not effect the stock price further as Vytorin’s market share is stabilizing.
Valuation
Given SGP’s low exposure to patent expiration and promising pipeline revenue, investors would expect to see SGP have a premium multiple. This is not the case.
Looking at the industry’s P/S and P/E multiples we see SGP trading inline with its more patent exposed and less pipeline plentiful competitors. I feel SGP is deserving of conservative industry leading forward multiple of 15x giving me price target of 26.00, representing 20% increase from yesterday’s close.
Disclosure: Author holds no position in the above-mentioned securities.
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This article has 5 comments:
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J. Christoph Amberger
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21 Comments
My Website
Aug 08 11:30 AMBased on the demonization of oil companies and the call for redistribution of their 8.9% margins, the public image of HMOs and pharma companies would indeed make these industries prime candidates for confiscatory tax policies and tort/malpractice lawsuits.
Would you mind addressing how a change in the political culture would affect these companies?
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Capitalist Cow
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10 Comments
My Website
Aug 08 11:44 AMI speak to this in my past article located at capitalistcow.com/2008.../
I am arguing that a political culture shift will not occur, or Obama is no different than any other divisive politician. You assume the will exists in Washington to accomplish a task of this magnitude.
It has been very difficult to accomplish any reform in congress over the past 15 years. I look to the first attempt at healthcare reform, social security reform, immigration reform, and more recently energy policy. This is likely to continue with a 49-49 political party deadlock in the Senate and the small 236-199 democratically led House.
Do feel that there will be a new culture of progress in Washington, which will allow major reforms to get past?
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bearfund
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548 Comments
Aug 09 03:17 PMI'm pretty sure, however, that SGP isn't it. The author first argues that the push to confiscate patent drug premiums won't likely hurt the pharmaceutical industry much because most of its patents are expiring anyway. Ok, maybe. But he then goes on to suggest that SGP is better off because it will have more revenue from drugs under patent protection going forward than its competitors. In that case, wouldn't it simply have the most to lose from a confiscatory policy regime? And before you tell me I'm simply misunderstanding and that Mr. Barath really means the relaxation in prices will quell the call for that sort of regime, I might observe that a policy that has little far-reaching effect but is seen to be "Doing Something About the Problem" is exactly the sort of thing politicians love. If the first argument is correct, this sort of policy should be attractive. Either way, SGP would be the loser. In a free market, I'd agree with much of this investment thesis and consider SGP more seriously. This is not a free market.
No position.
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Capitalist Cow
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10 Comments
My Website
Aug 09 10:16 PMWhat evidence do you cite for your argument that government will have a large impact of the success or failure of these private firms? And do you feel that this is not priced into the equities currently trading at historically low valuations?
Sure, government may be large purchasers of good from different industries, but when has government ever intentionally put an entire industry out of business. This is anything but the American way.
Where do you get your forecast for a societal collapse? One of the most critical flaws and highlights of democracy is that it is slow to move. Look at the multiple attempts to reform Social Security, Medicare, and Medicaid. Look at the current hot button issue, energy prices. Has there been any progress toward making meaning change? And this is when 80% of Americans want offshore drilling.
How likely do you think it is that Congress will get enough momentum to make a healthcare reform which is clearly a poor economic decision?
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Bull-y
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1 Comment
Sep 30 07:26 AMwww.nurses.com/article...
any thoughts on this?