Many pundits have sounded the death knell for the giant pharmaceutical companies. The logic goes that they’re unwieldy behemoths who are losing top-selling drugs to generics and can’t come up with new blockbusters through their research.
But rumors of their demise are exaggerated. Big pharma companies are shedding extraneous units to focus on new drugs and working with other drug and biotechnology companies to create new medicines. That makes some of their stocks attractive. Consider Pfizer (PFE) and Bristol-Myers Squibb (BMY).
The world’s biggest drug company just announced an agreement to sell its Capsugel unit, which makes wholesale pill casings, for $2.38 billion to private-equity firm Kohlberg Kravis Roberts. The company will use the proceeds to increase the $5 billion in share buybacks it already planned.
While Pfizer loses revenue thanks to the deal, its share repurchase will offset that loss, so earnings per share aren’t affected.
Look for more sell-offs from Pfizer, which will mean a bigger influx of cash, analysts say.
“Our hope is that this represents the starting point of a larger series of divestitures by the company,” Tim Anderson, an analyst at Sanford Bernstein, writes. Pfizer may shrink the company’s revenue base by almost half, he says.
Though Pfizer will lose patent protection on its cholesterol medicine Lipitor this year, it has many drugs in the pipeline to make up for it.
The company saw its revenue increase 4 percent last year to $19.48 billion from $18.81 billion in 2009. Bristol-Myers is shedding jobs and non-drug divisions, as its blockbuster cardiovascular drug Plavix will soon go generic.
But the firm has ready replacements. It’s waiting for approval from U.S. regulators for six new drugs.
Analysts expect the new drugs to more than make up for the patents Bristol-Myers will lose in coming years. And the cash it receives from dumping non-core businesses will give it the resources to make more acquisitions and partnerships.
“We expect sales from continuing operations in 2011 to advance about 4 percent from the $19.5 billion of 2010,” writes Standard & Poor’s analyst Herman Saftlas. He has a 12-month target of $30 for the share price, up 9 percent from the April 18 close of $27.58.
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