GlaxoSmithKline plc (ADR), Merck & Co., Inc., Pfizer Inc., Sanofi SA (ADR): Are Big Pharma Stocks In Trouble?

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March 16, 2015 2:56pm ETF BASIC NEWS

pills healthcareJay Taylor: I recently shared with you a story about a billionaire hedge fund manager who has declared war against the pharmaceutical industry and the patents it uses to protect big corporate profits.


After reading into this new war on drugs I began to worry about Big Pharma stocks. Now that I’ve started digging into specifics and financials for some of the largest pharmaceutical stocks, I’m much less concerned.

I’ll explain why in a minute. But first, some background.

The hedge fund Hayman Capital fired the first shot against the pharmaceutical industry in early February. The firm filed an official challenge to a patent protecting Ampyra, the drug responsible for 91% of revenue earned by Acorda Therapeutics (NASDAQ:ACOR).

The stock fell nearly 10% in two hours after news of the challenge first broke. The company is now down over 13% since the announcement.

The hedge fund manager, Kyle Bass, argues that the patent in question and other “BS patents” aren’t valid. He also questions a practice called “pay for delay,” through which a drug company with a soon-to-expire patent pays off generic drug makers so they don’t attempt to produce generic versions of the lucrative name-brand drug.

According to the National Public Interest Research Group, the top 20 “pay for delay” drugs have made drug companies $98 billion in revenue while generic alternatives were delayed.

The top 20 “pay for delay” drugs identified by the group are produced by a mix of publicly traded and private companies.

Here are the 10 pharmaceutical stocks that I originally thought were vulnerable to “pay for delay” challenges:

  • Shire (Nasdaq: SHPG)
  • Sanofi (NYSE: SNY)
  • Abbott Laboratories (NYSE: ABT)
  • Bristol-Myers Squibb (NYSE: BMY)
  • Pfizer (NYSE:PFE)
  • Merck (NYSE:MRK)
  • GlaxoSmithKline (NYSE:GSK)
  • AstraZeneca (NYSE:AZN)
  • Teva Pharmaceutical Industries (NYSE:TEVA)

The list is essentially a “who’s who” of Big Pharma stocks. Some of these companies are huge – Pfizer alone is worth more than $200 billion – so I knew that a major shakeup of the industry could have a huge impact on investors.

The chart below lists these stocks, the drugs in question and the market capitalization of the companies.

3.6.15 Pharmaceutical Table

What jumps out is that these are not small companies – the smallest is worth $46 billion.

After taking a close look at each of these companies and the amount of revenue generated by the drugs identified as “pay for delay,” I’m not convinced that any of them are at major risk.

Kyle Bass may succeed in challenging patents from which these companies benefit. But these are huge and diversified pharmaceutical giants.

Pfizer generates 4.3% of its revenue from “pay for delay” drugs Caduet, Effexor XR and Lipitor. But this is the largest concentration of revenue from this type of drugs that I found among the stocks on this list.

Though Kyle Bass’ war on Big Pharma stocks should certainly concern investors, I don’t think shareholders of huge pharmaceutical stocks like Pfizer, Bristol-Myers Squibb and Merck should worry.

That said, you should worry if you hold shares of a pharmaceutical stock – regardless of size – that generates a significant amount of its revenue from one or two products.

Acorda Pharmaceuticals is a perfect example.

The company is only worth $1.5 billion, which is relatively small for a pharmaceutical stock. Most importantly, the company generates 91% of its revenue from one drug. There may be several patents protecting it, but this concentration of revenue is simply too high.

Do you own pharmaceutical stocks? If so, take a close look at the company’s annual and quarterly reports. If a high concentration of revenue – say, 10% or more – comes from one product, you’d better be certain its patent protection is rock solid.

This article is brought to you courtesy of Jay Taylor from Wyatt Research.

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