This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

A Better Way to Play Pharma

This column was originally published on RealMoney on Nov. 8 at 8:07 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

Over the past few weeks, I have heard a couple of different analysts refer to big domestic pharma stocks as bonds, and that got me to thinking. The idea of a drug stock as a proxy for a bond doesn't hold up very long, but perhaps the higher-yielding drug stocks could be a proxy for Treasury inflation-protected securities, or TIPS. But how do these match up against pharma ETFs as a way to play the sector? Let's take a look.

I maintain very little exposure to big American pharma -- clients own Johnson & Johnson (JNJ), but that's it. And I invest in overseas drug companies in the context of foreign diversification.

The problem I see with American drug companies is that they have poor prospects for double-digit revenue growth. Pfizer (PFE - Get Report) has about $52 billion in revenue. Consensus for 2006 is no revenue growth. Will it be able to find $5 billion in new revenue for 2007? If it does, will it then be able to find $6 billion in 2008? I don't see how it can. If it can't, it's reasonable to believe the stock will idle, assuming no death-blow news to one of its drugs.

My expectations for price appreciation for the big domestic drug companies are very low. TIPS also have quite low chances for price appreciation (their par value inches up at the rate of inflation, and they pay an interest rate that is usually lower than that of regular bonds), so there's one thing they have in common.

The drug-stock-as-bond comments that I heard referred to individual stocks. Bondholders don't usually take on single-stock risk, so for me, a stock doesn't quite hold up as a bond substitute.

The drug sector ETFs might be a different story. Clearly, any product that reasonably diversifies its holdings won't have substantial single-stock risk.

A five-year TIPS yields about 1.8%. The Healthcare Select Sector SPDR (XLV) yields 1.2%. The Merrill Lynch Pharmaceutical HOLDRs Trust (PPH) yields 2.5%.

Hard Times in Pharmaceuticals
Merck and Pfizer have dropped significantly over the past few years; pharma ETFs have held up better.
Click here for larger image.
Source: BigCharts.com

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
PPH $70.24 -1.47%
XLV $72.50 -1.73%
C $51.52 -0.23%
MRK $57.48 -1.47%
PFE $34.79 -0.60%

Markets

DOW 17,776.12 -200.19 -1.11%
S&P 500 2,067.89 -18.35 -0.88%
NASDAQ 4,900.8850 -46.5560 -0.94%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs