Last year I gave grades to 16 large-cap pharmaceutical companies. It only seemed right to do it again. I've given letter grades between F and A+ to all pharmaceutical companies that have market capitalizations above $50 billion (now there are 17, one more than last year). It's like high school with unpronounceable brand names.
How a drug company performed, operationally and in terms of stock appreciation, is not the sole indicator of whether its stock is appropriately priced. I’ve included my take on each stock to try and hammer this point home. Last year, the company I ranked lowest was the best buy; I think there's an argument that could be true this year, too. Instead of buy, hold, and sell, I’m using yes, maybe, and no. The stock appreciation and financial data below are via Factset Systems; the drug approval counts come from Bernard Munos. Let me know what I got right, and please tell me what I got wrong.
Top Of The Class
1. Actavis
Total return: +53.2%
Market capitalization: $68 billion
Latest quarterly sales: $2.8 billion
New drug approvals: 1
Five-year total return: 549.9%
Grade: A-
Actavis’ is changing the Big Pharma M&A landscape, and perhaps the way that large drug companies are run. In the past year, Actavis spent $25 billion to buy Forest Laboratories, the legendary maker of antidepressants and Alzheimer’s drugs, in February and then announced plans to buy Botox-maker Allergan for $66 billion in November, ending a long battle between that company and would-be acquirer Valeant.
It says something about Wall Street’s appetite for deals that Actavis is worth half again as much as it was a year ago, more than twice the 21.9% return notched by Valeant. (Allergan investors, meanwhile, got a 92% return.) But new chief executive Brent Saunders, who came with the Forest acquisition, says this isn’t just a roll-up. He says creating a new kind of “growth pharma” that combines generic drug-making (Actavis’ traditional business) with creating franchises of valuable pharmaceutical brands. Will it work? Who knows, but this is the best-performing big cap drug stock of the year, and we’re all going to be watching.
Should you buy it? Yes, but watch carefully. At least at first, any problems are likely to get lost in the merger-related cost cutting.
2. Celgene
Total return: +32.4%
Market Capitalization: $89 billion
Latest quarterly sales: $1.98 billion
New drug approvals: 1
Five-year total return: +301.8%
Grade: A-
The big risk for Celgene is how well patents for its top-seller, Revlimid for multiple myeloma, will hold up. Bernstein Research expects they’ll hold until 2026. Has any company done as well at building a pipeline through licensing? Celgene has a piece of the hottest areas in cancer development: the metabolic drugs being developed by Agios Pharmaceuticals and the CAR-T cells it is working on with Bluebird Bio. Chief Executive Robert Hugin is simply doing a very, very good job.
Should you buy it? Yes. Keep an eye on the patent litigation, though.
3.
[/entity]Total return: +42.3
Market Capitalization: $121 billion
Quarterly sales: $5 billion
New drug approvals: 1
Five-year total return: 201%
Grade: B+
At the beginning of last year, Amgen was probably the most-hated of the big biotechs. Investors just didn’t like chief executive Robert Bradway, and preferred Gilead, Celgene, and Biogen. What changed their minds? In part, a stake by activist investor Third Point Capital led to hope that the company will be pressured into shareholder-friendly moves that could even include a breakup.
But there was genuine good news, too. Amgen’s biggest win: clinical data supported the usefulness of Kyprolis, the multiple myeloma drug Amgen acquired when it bought Onyx Pharmaceuticals for $10 billion. Hopes for its new cholesterol drug, evolocumab, and other pipeline drugs are rising. It got approval for Blincyto, a cancer drug, and the company looks well-positioned to launch other copycats of other companies’ off-patent biotech drugs.
Should you buy it? Maybe. Amgen’s valuation may be back in line with the rest of biotech, but should still do well if the market for new cholesterol drugs turns out to be big.
4. Eli Lilly
Total return: 39.8%
Market Capitalization: $77 billon
Latest quarterly sales: $4.9 billion
New drug approvals: 3
Five-year total return: 141.7%
Grade: B+
Last year I gave Eli Lilly the lowest grade of any Big Pharma, a C. It turned out to be a great stock. And the company has delivered on multiple fronts: it has made inroads back into its traditional stronghold of diabetes, received approval from the Food and Drug Administration for gastric cancer drug Cyramza, and advanced a pretty nice pipeline of experimental drugs.
I’m still nervous about its two biggest opportunities: evacetrapib for heart disease and solanezumab for Alzheimer’s disease. Neither is crazy, but they are high-risk bets at the least.
Should you buy it? Maybe, but I feel chastened on this one. Measuring the upside and risk of its experimental drugs is left as an exercise to the reader.
Solid performance
5. Gilead Sciences
Total return: +25.5%
Market capitalization: $142 billion
Quarterly sales: $6 billion
New drug approvals: 2
Five-year total return: +335.7%
Grade: B
The best product launch in pharmaceutical history, for hepatitis C drug Sovaldi, is baked into the stock already. Gilead has done a good, but not great, job responding to the controversy over the drug’s $83,000 price point. Shares were hit late in the year when investors were surprised that rival AbbVie really was willing to grant huge discounts for its rival hep C treatment in order to gain market share. Bears argue that the risk to its franchise of HIV drugs is bigger than the Street expects.
Should you buy it? Yes. Worries about price competition in the hepatitis C market are overdone. There will be a huge advantage to being the best and first entrant. And Gilead has both a pipeline (think hepatitis B and non-alcoholic liver disease) and the cash to make a smart acquisition.
6.
Total Return: +28%
Market Capitalization: $104 billion
Quarterly sales: $5 billion
New drug approvals: 1
Five-year return: N/A
Grade: B
AbbVie's deal to give a discount (nobody knows how big a discount) to Express Scripts to get its Viekira Pak on the boards as a hepatitis C treatment was played perfectly. Excitement continues to build for cancer drug ABT-199.
Should you buy it: Maybe. I worry that Viekira will be very vulnerable to new entrants, like the one being developed by Merck.
7.
Total return: +18.5%
Market capitalization: $224,118.3
Quarterly sales: $12.6 billion
New drug approvals: 2
Five-year total return: +100.1%
Grade: B
Novartis’ stock continued to deliver a steady return, and the company did some smart things: its purchased of GlaxoSmithKline’s cancer assets, its shedding of divisions like its vaccine business, and the continued investment in CAR-T therapy, where it seems to have bought a leading position, at least in terms of beating competitors to market. The biggest near-term opportunity: the market for its heart failure drug LCZ696. CEO Joseph Jimenez has been doing a solid job.
Should you buy it? Yes. Novartis is unlikely to deliver Celgene-like returns, but continues to be a remarkably steady and well-managed big pharma.
8. Merck
Total return: +16.9%
Market capitalization: $162 billion
Quarterly sales: $10.5 billion
New drug approvals: 3*
Five-year total return: +89%
Grade: B
I’m giving Merck a better grade than its annual (or, for that matter, five-year) stock appreciation deserves because I’ve been impressed by its execution. The company notched several FDA approvals this year, not the least of which included the melanoma drug Keytruda, which works by unlocking the immune system to attack tumors. What’s impressive is the way it leapfrogged Bristol-Myers Squibb to be approved first. Similarly, its hepatitis C program suddenly looks competitive after the June $3.8 billion acquisition of Idenix. Wall Street is less than impressed with the $8.4 billion purchase of antibiotic maker Cubist, but I think bolstering Merck’s antibiotic pipeline could outweigh the downside of a negative patent ruling on Cubist’s main drug, Cubicin.
Should you buy it? Yes, but cautious investors might wait for after the results of the TECOS trial of top-seller Januvia, for diabetes, early next year; if side effects emerge for the drug, that would be a big negative for the drug giant.
Munos' data excludes Merck's oral desensitization therapies for allergies, Grastek and Ragwitek. If we include them (and I think that's proper to do) Merck would have five approvals, the most of any company.
9.
Total return: +25.2%
Market capitalization: $89 billion
Quarterly sales: $6.5 billion
New drug approvals: 4
Five-year total return: 92.9%
Grade: B-
Pfizer’s failed $118 billion bid certainly convinced the market there was value here. AstraZeneca had more drug approvals from the Food and Drug Administration (four) than any other company, and its pipeline includes promising cancer and asthma drugs. Still, it is hard to get excited about the prospects for blood thinner Brilinta or fish oil Epanova. An uncomfortable question: Wouldn’t investors be better off now if they’d given in to Pfizer’s advances?
Should you buy it? Maybe not. The company’s R&D engine is revving up, but I still worry about its ability to deliver sales growth.
10. Johnson & Johnson
Total Return: +17.3%
Market capitalization: $292 billion
Quarterly sales: $18 billion
New drug approvals: 1
Five-year return: +91.2%
Grade: B-
Steady performance. Plenty of people might have expected Xarelto, the blood thinner, or Zytiga, for prostate cancer, to have suffered more from competition; instead, both continue to do well. Being co-developer of Pharmacyclics’ Imbruvica has certainly proved to be a good investment, and the company’s anti-infectives work, including against neglected diseases like Ebola and tuberculosis, is socially important.
Should you buy it? Maybe, if it’s for the solid returns and the strong dividend.
11. Novo Nordisk
Total return: +16.1%
Market capitalization: $87 billion
Quarterly sales: $3.9 billion
New drug approvals: 0
Five-year total return: +253.3%
Grade: B-
Novo Nordisk maintains its dominant position in the diabetes market, and continues to deliver steady growth. But the days of its rapid expansion into the American market, and concomitant surge in stock price seem over. The departure of current chief executive Lars Sorenson, who engineered Novo’s rise, could be good for shares if investors get behind the new CEO.
Should you buy it? Maybe.
12. Biogen Idec
Total return: +21.5%
Market Capitalization: $80 billion
Quarterly sales: $2.5 billion
New drug approvals: 3
Five-year return: +534.9%
Grade: B-
Biogen failed to keep up the heady returns of 2013, when it launched its multiple sclerosis drug Tecfidera and its shares jumped 92%. Some of the worry is that the patents protecting the drug may be weak, and are certainly not long-lived. The company did notch three approvals, including two promising hemophilia drugs. Positive early data for an Alzheimer’s drug helped the stock, but the big question will be what early data for its experimental MS drug, anti-LINGO, shows in January.
Should you buy it? Maybe, if you think the anti-LINGO data in January will be positive. If big cap biotech continues its run, this is now the one that has room to catch up.
13.
Total return: +14.2%
Market capitalization: $98 billion
Quarterly sales: $3.9 billion
New drug approvals: 1
Five-year total return: +183.1%
Grade: B-
Last year I gave Bristol-Myers Squibb the highest grade of any drug company – an A+. At the time, it was the Big Pharma that traded like a biotech thanks to its emerging lead in using the immune system to fight cancer. This year, it barely matched the S&P. It seems to have fallen behind Merck in hepatitis C, and even let Merck beat it to having the first immune-oncology drug approved in the U.S. But its strength in this hot, emerging area is still inarguable.
Should you buy it? Yes.
Bad Luck or Worse
14. Roche Holding
Total return: -1.0%
Market capitalization: $230 billion
Quarterly sales: $11.5 billion
New drug approvals: 1
Five-year total return: +92.8%
Grade: C+
Roche is the world’s biggest maker of cancer drugs, selling $30 billion worth of oncology products each year, three times what Novartis, the next biggest oncology company, does. On December 14, Roche was hit by news that its breast cancer drug Kadcyla failed to outperform its older drug, Herceptin, in a clinical trial, forcing financial analysts to trim forecasts for years. One of the Alzheimer’s drugs it is testing, gantenerumab, failed to be effective in a larger study, causing the stock to give back a year of gains. I worry that Genentech’s top-of-the-industry drug development sense has been dulled by being forced to focus on heart and diabetes drugs that never had much chance of working.
Should you buy it? Maybe. The Alzheimer’s news may not mean much, but trimming Kadcyla numbers hurts financials for years. Counterargument? It’s cheap, and still has a deep cancer pipeline.
15.
Total return: +5.3%
Market capitalization: $196 billion
Quarterly sales: $12.4 billion
New drug approvals: 1
Five-year total return: +106.7%
Grade: C
Pfizer’s decision to make a run for AstraZeneca was an investor-relations disaster. Investors had been hoping that Pfizer was building itself toward a breakup. Doing a giant deal in order to execute a tax inversion wasn’t in the plan. Then, the deal fell apart, leaving Pfizer looking hapless. Worse, the company is far behind in immune-system targeting oncology drugs, and investors don’t believe its breast cancer drug palbociclib will be approved this year. Badly done.
Should you buy it? Maybe. Palbociclib’s chances are better than people think, and the company represents a value compared to the rest of pharma.
16. Sanofi Sponsored ADR
Total return: -12.8%
Market capitalization: $120 billion
Quarterly sales: $11.5 billion
New drug approvals: 1
Five-year total return: +35.8%
Grade: C-
Well, the wheels fell off here. After years of taking big price increases, sales of Lantus, Sanofi’s big-selling insulin, crashed. Former chief executive Christopher Viehbacher never delivered the earnings growth he promised, wound up in a public battle with the board, and was fired. Andy Plump, one of the company’s top researchers, went off to run Takeda. Over both a one-year and five-year period, Sanofi is the second-worst-performing mega-cap pharma.
Should you buy it? Actually, yes. It’s a cheaper way to play the pipeline developed by Regeneron. We’ve all seen what comes next before: a new CEO comes in, promising a turnaround, and gets a grace period from Wall Street. It’s a good time to own a drug stock.
17. GlaxoSmithKline
Total return: -15.7%
Market Capitalization: $102 billion
Quarterly sales: $9.35 billion
New drug approvals: 1
Five-year total return: +31.4%
Grade: C-
Glaxo was fined $500 million for bribery in China. In the third quarter, sales of its respiratory drugs, including the $8 billion blockbuster Advair, slid 8% due to competition from generics and from AstraZeneca’s Symbicort. It’s really not clear what, in the near term, could turn things around.
Should you buy it? No – not until there is a clearer plan for a path forward. The main argument for the stock is that things are so bad the price is good.
