In a previous post I spelled out, why I am buying healthcare stocks for an Obama presidency . In that post I promised to provide three stocks that would benefit from this fact. The first stock was AET and now I will discus the second stock in this series, Schering-Plough Corporation.
Schering-Plough (SGP)
Schering-Plough discovers, develops, manufactures, and sells pharmaceuticals worldwide. The company has a joint venture with Merck & Co., Inc. for the development and management of two cholesterol-lowering drugs and an allergy/asthma drug.
Political concerns over government price negotiations with pharma companies have pressured the industry’s stock prices over the past year. I feel that this impact will not be as large due to its slowing momentum in Washington and the patent expirations coming in the next 3-7 years. These patent expirations will lower drug costs for consumers and insurance companies devoid of any government plan.
It is apparent that many big pharmaceutical companies are facing numerous blockbuster patent expirations in the next 3-7 years. In my opinion, Schering Plough has the best portfolio and pipeline position within the big-pharma group. Although SGP stock has faced headwinds from a recent ENHANCE panel, which I will discuss, I feel because of their above average portfolio/pipeline SGP will out perform its competitors in the next 12-18 months.
Product Portfolio and Pipeline
Almost every U.S. pharma company will experience sharp blockbuster patent expirations starting in 2011. Add this to a large pipeline shortfall along with the fact that drug development takes a decade and the future becomes very foggy for these firms.
In this fog, one pharma firm stand out, Schering Plough. SGP has the lowest patent exposure in the industry, with only 15% of current revenues exposed to patent expirations in the next 7 years. This relatively low exposure will allow SGP to remain the industry’s top growth firm well into 2012.
SGP has its fair share of patent expiration in the next 7 years, these include Zemuron, Puregon(Follistim), Livial, Temodar, Implanon, Noxafil, Depot, Avelox, and Asenapine. But if you look at the expected revenue of SGP’s pipeline compared to the loss of patent exposed revenues, SGP is an industry leader. Its 2015E pipeline revenues exceed its patent exposed revenues by 11.6%.
Given the above information, you can see why I feel SGP has the best pipeline/portfolio mix to weather the coming patent expiration storm.
Concerns over ENHANCE Cholesterol Findings
The study found that Vytorin, a combination of Merck’s Zocor and Schering’s Zetia, worked no better than Zocor alone at removing plaque from arteries. This has had the effect of reducing the market share of Vytorin from ~12% to about ~9.0%, where it has stabilized since April. The ENHANCE panel results should not effect the stock price further as Vytorin’s market share is stabilizing.
Valuation
Given SGP’s low exposure to patent expiration and promising pipeline revenue, investors would expect to see SGP have a premium multiple. This is not the case.
Looking at the industry’s P/S and P/E multiples we see SGP trading inline with its more patent exposed and less pipeline plentiful competitors. I feel SGP is deserving of conservative industry leading forward multiple of 15x giving me price target of 26.00, representing 20% increase from yesterday’s close.
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