The Pharma Stocks We’re Buying Now
I explained why my firm is investing in pharmaceuticals stocks, despite the sector being a favorite punching bag of politicians. I noted that we have recently added to our existing positions in Amgen, Allergan, and Gilead Sciences, and I promised that I would unveil two new positions this week.
Mylan has two businesses: It is one of the top three global generic drug manufacturers (the source of the bulk of its revenue), and it is the maker of the EpiPen. Its stock peaked at $76.06 in April of 2015 and but halved by the end of 2016 before rallying this year.
The stock decline accelerated in 2016 after Mylan made a horrible public relations misstep when it doubled the price of its EpiPen from $300 to $600. The EpiPen is a handheld device that injects adrenalin to prevent an allergic reaction from causing asphyxiation. Mylan has raised prices on the EpiPen 10 to 15 percent twice a year over a five-year period, increasing the cost at least three to four times. The EpiPen patent expired long ago, but there has been no generic competitor on the market.
The EpiPen fiasco has created an opportunity. Mylan’s generics make up a decent, stable business that just spits out a lot of cash flow (we like the pricing power of branded pharmaceuticals companies more). Mylan will be bringing a generic EpiPen to the market at a 40 percent lower price point this year. Despite the negative PR and commotion, EpiPen will contribute about 50 cents to Mylan’s earnings in 2017, which we expect to be around $5.50 a share and then grow to $6 to $7 by 2019. At six times earnings Mylan is simply too cheap to ignore.
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I am the CEO at IMA, which is anything but your average investment firm. (Why? Get our company brochure here, or simply visit our website).
In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.”
I’ve written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (I’m working on a third - you can read a chapter from it, titled “The 6 Commandments of Value Investing” here).
And if you prefer listening, audio versions of my articles are published weekly at investor.fm.
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