Big Pharma Stocks Slip
As Drug Pipelines Thin
April 18, 2008

Not long ago, drug giant Pfizer Inc. was the kind of stock deemed safe enough for Aunt Sally's portfolio.

Which is why the old dear may have to live on cat food for the rest of her days.

Pfizer stock, which slumped again Thursday after disappointing earnings, just hit a 52-week low. But that's not the half of it.

Look at the performance over 10 years. The stock is down nearly 40%. Even when you include reinvested dividends, investors have lost 25%.

That's about a 43% loss of purchasing power in real terms.

Yes, that leaves the shares looking cheap, at least on the face of it. Pfizer stock trades for less than 10 times forecast earnings, and yields nearly 6.5%.

As long as the dividends don't get cut, that's pretty good. The big concern is what happens after 2010, when the company's blockbuster drug Lipitor comes off patent.

DIVIDEND YIELDS

Company	Yield
Pfizer (PFE)	6.3
Bristol-Myers (BMY)	5.8
Glaxo (GSK)	5.0
AstraZeneca (AZN)	4.6
Merck (MRK)	3.8
Eli Lilly (LLY)	3.6
Wyeth (WYE)	2.6
Abbott (ABT)	2.5
Johnson & Johnson (JNJ)	2.3
Schering-Plough (SGP)	1.6

Source: FactSet. Note: Dividend yields are estimates only, and dividends are subject to change

Obviously there's bear case on the stock at these levels, and a bull case.

But Pfizer is far from alone. The entire pharmaceuticals sector is trading at very depressed levels.

Among the reasons: Drug pipelines are thinning. And drug discovery is a risky and an ever-more expensive business.

But there is also real fear on Wall Street about what the next administration in Washington D.C. will mean for the entire healthcare sector, including the pharmaceuticals companies. Once again the market fears tighter price controls, or worse.

Consider: Sen. John McCain (R., Ariz.) ought to be the pro-business candidate. But as he admitted during a debate in New Hampshire a few months ago, even he considers the big drugs companies to be villains.

With friends like this, who needs enemies?

No wonder shares across the industry offer low valuations and fat dividend yields. Look at the yields in our table, below.

The last time valuations were this low was during the "Hillarycare" panic back in 1993-1994. We are, it seems, back there again.

The question is whether that makes this an investment opportunity. Wall Street, on the whole, tends to be too optimistic about the stocks in fashion and too pessimistic about the ones it dislikes. I've found that the sector Wall Street hates the most usually ends up doing best over the next five to 10 years.

In 1999, the Street was willing to pay nearly 50 times earnings for Pfizer. Ludicrous.

Now it won't pay 10. (Back then, incidentally, you could hardly find any serious investor willing to pay $275 for an ounce of gold).

If you want to invest in pharma, don't waste your time trying to pick individual stocks. Even most fund managers find it hard to pick individual stocks successfully. There are dozens of analysts following companies like Pfizer. How is an individual investor going to find something they don't?

You'll probably be much better off investing in the sector overall through a sector fund.

Among the many options are low-cost index funds, like the Health Care Select SPDR (XLV) or the Global Healthcare iShare (IXJ) exchange-traded funds, and actively managed mutual funds such as T. Rowe Price Health Sciences (PRHSX).

Write to Brett Arends at This email address is being protected from spam bots, you need Javascript enabled to view it

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Big Pharma Stocks Slip As Drug Pipelines ThinApril 18, 2008

Big Pharma Stocks Slip
As Drug Pipelines Thin
April 18, 2008