Jim: Earlier, we took
our head-to-head series one step
further, and talked about key metrics...
Lowe's (LOW)
versus
Home Depot (HD)...
Now, we're looking at drugs, big
pharma... two household names you
ask me about all the time...
Pfizer (PFE)
and
Johnson & Johnson (JNJ)...
I know from
the Lightning Round, you're all ears
about these...
So, I've got to give you what you
want, right...
. . . .
.
Now, here's the deal...
People don't understand how to do what
I'm about to describe. They see PFE, at
$19, down and out, and think it's got to
be cheap, because it's off huge from its
high... and they see the 6.5% yield.
Then they see JNJ, of a point and change
from its high, with a puny 2.6% yield...
and they think, hey, time to sell JNJ
and to get into PFE... But no, no, no,
no... not at all!...
Because we don't value drug stocks on
price. No. We buy drug stocks... not for
the yield... These are not municipal
bonds, for heaven's sake...
We buy them for three things...
consistent long-term growth, invention,
and patent protection... and, by those
scores, PFE is expensive. JNJ is cheap.
. . . .
.
Now we use a 10-point scale around here
to measure stocks, to see if they're
worth buying. The first 5 points of the
scale are a stock's sector. 50% of a
stock's forward performance is dictated
by the sector...
But, because I want to focus on the key
metrics for big pharma tonight, we're
not going to spend as much time on the
other parts of the 10-point scale. Just
know that, right now, with recession
looming and no clear sign of a turning
economy, and 309 days before we get a
housing bottom... Well, let's just say
that pharmaceuticals are safe. But the
problem is that pharmaceuticals
themselves aren't able to generate the
kind of growth that triumph over
pathetic low-growth to no-growth
economy... in part, because of a lack of
new products, and a termination of
valuing the old ones, because of patent
expiration...
Plus the democrats... big fans of
confiscatory logic... hate big pharma...
and view it as the enemy... and there's
little doubt that they'll come out ahead
in November...
So let's give the sector only a 3 out of
5, because of all those problems... In
other words, it is not as safe as a
utility stock, or a biotech even...
. . . .
.
Next, we always look at growth and
consistency, when using the 10-point
scale...
With big pharma, that means we focus on
the key metrics... what big drugs are
losing patent protection, what they've
got in the pipeline, and what they've
done to offset the fact that they're
losing patents left and right...
There was a time when drug companies led
a balanced life... some over-the-counter
drugs, the kind you see in the aisles of
the drug stores, and some prescription
drugs that you get behind the counter...
The drug companies liked the high
margins of prescription meds, so
one-by-one, they shed the low-margin
front-of-the-drugstore products for
drugs that can be prescribed. PFE was
all over this trend, but not JNJ. In
fact, PFE sold its consumer products
division to JNJ last year... It was a
big loss for PFE, even though they
didn't seem to know it... they gave all
the streams of low-income, low-margin to
JNJ, but JNJ's cleaning up on it...
And JNJ waits for big, new drugs to be
approved. PFE can't, because the
cupboard's bare...
JNJ gets 24% of its sales from the
consumer segment, meaning stuff in the
aisles at CVS... 40% from drugs,
alright... PFE gets 92% of its sales
from drugs, and only 8% from other, and
that's mostly animal and healthcare... I
don't see a lot of chickens and cows in
that Walgreens!...
So, JNJ has a better product mix, but
what about those patent expirations...
the next key metric?... Who's in the
most trouble?
Between now and 2011, JNJ will lose
about $3.8 billion worth of annual
sales, due to five big patent
expirations. That's bad, but PFE is much
worse. From now until 2011, it's going
to lose $6.6 billion in annual sales,
due to seven patent expirations. And
worse, one of those is Lipitor, their
biggest franchise. People on the Street
look at that cholesterol franchise and
they think, this is a bond that will
stop paying. Who wants to own that?
2 points to JNJ, okay... for keeping the
boring stuff, and not having that many
patent expirations, compared to PFE,
which I think is going to get crushed by
patent expirations, and doesn't have
much to offset them at the front of the
CVS...
Now the score is 5 to 3, okay...
That patent expiration thing is just
horrible, and you really want these kind
of boring things (basic consumer
products like JNJ has)...
. . . .
.
Now, about the pipelines... the next key
metric... as drug development is big
pharma's endless task, as it tries to
replace lost growth...
JNJ expects to have 7-10 new products
for approval between 2008 and 2010...
PFE expects to start 15-20 Phase III
trials - right before approval - between
2008 and 2009, with between 24 and 48
programs in Phase III by the end of
2009. Between 2010 and 2012, PFE is
looking to have between 15-20
submissions to the FDA. That is a much
bigger pipeline than JNJ's, so we're
going to give a point to PFE, okay...
JNJ still leads 5 to 4...
PFE will need every one of these birds
in the bush because, right now, it is
almost devoid of birds in the hand...
. . . .
.
Then there are the intangibles...
This is really important when it comes
to drugs...
Culture... JNJ has a great culture...
PFE, unfortunately, has none to speak
of...
Management at PFE... run by a lawyer...
That means it might as well be run by a
wrecking crew...
Warren Buffett
owns JNJ and let's face it... when
you've got the Buffett halo, you're
innocent until proven guilty...
So give another point to JNJ... I know
that's subjective, but I have to give it
to you the way I see it.
6 to 4... JNJ wins.
. . . .
.
How's that stack up to what the market's
paying?...
JNJ has a price-to-earnings multiple of
15x on next year's earnings. That's
where we put the P/E... I used to teach
this at Goldman Sachs, believe it or
not... while PFE trades at 7.7x... Wow,
PFE seems cheap right?...
And I've got to say that I think the
market is valuing JNJ actually right...
and PFE could be cheap, but here's the
thing... I don't want to own PFE... It's
got a 4.
So, even with the stock at $19.28...
even though it yields 6.5%... my verdict
is that you can't buy it. JNJ is
cheaper, because it's got all those
other things that we look at... and, on
a pullback to $68, I want to own it.
