Big Pharma, Biotech or Generics?

  • December 14, 2005

Growing healthcare costs, exorbitant insurance premiums, increased life expectancy and the aging of the “baby boomer” population certainly made me look closely at the healthcare industry in general and drug manufacturers in specific. It looks like there seems to be a localized bull market in Biotech while Big Pharma is taking a bad beating. To get a good picture, check out this two-year chart comparison of Pfizer (PFE) and Gilead Sciences (GILD). The two-year chart comparing Merck (MRK) and Genentech (DNA) is even more dramatic. Even the stocks of generic drug makers like TEVA (TEVA), Mylan (MYL) and Dr Reddy’s (RDY) have shown decent returns over the last year.

Watching Pfizer lose close to one-third of its value in just six months made me wonder if Wall Street had overreacted to the triple threat of generic drug competition, patent expirations and lawsuits faced by Pfizer. Buying a stock that is dropping fast is like trying to catch a falling knife. You could either hurt yourself or have a sharp edge (couldn’t resist the pun). The catalyst I was looking for with Pfizer occurred this week when Pfizer announced a 26% increase in its dividend. Due to the depressed stock price, this announcement put the dividend yield over 5% and was also a signal from the company about how it perceives its financial strength. I started a position in Pfizer and the stock is already up 8.5% in just two days. It is going to be interesting to see how things unravel in the future and if Pfizer’s pipeline of new drugs can make up for the loss in revenue from the looming patent expirations.