3 Profitable Pharmaceutical Stocks To Consider As Congress Debates Drug Bill

Mary-Lynn Cesar, Kapitall: Approval of Congress is at an all-time low, but a bill in the Senate could help pharmaceutical stocks reach highs.

Congressional approval fell to its lowest level in almost 40 years due to lingering bad feelings from last month’s government shutdown.

Read more from Kapitall: Value Investing: John Thompson Says to Ditch Tech, Buy Big Banks

According to a Gallup poll released on Tuesday, the approval rating currently sits at 9%, bringing the year-to-date approval rating to 14%, and increasing the likelihood that 2013 will result in the lowest yearly average Congressional approval rating in Gallup history.

Business as usual

The Gallup poll found that 59% of survey participants cited inaction and partisan gridlock as the leading reason behind their disapproval of Congress. And in the four weeks since Congress returned to work, the discord has reappeared: GOP senators blocked two judicial nominees, and House Speaker John Boehner stated his refusal to conference over the Senate’s immigration bill.

H.R. 3204: Drug Quality and Security Act

But Congress has made slight headway in some regards: the Senate voted 97-1 on Tuesday to advance the Drug Quality and Security Act, a bill that will place compounding pharmacies under more Food and Drug Administration (FDA) oversight. The bill, which has overwhelming bipartisan support, was passed by the House in September and requires Senate approval before President Obama can sign it into law.

Compounding pharmacies mix or change ingredients to create tailored medications for the needs of specific patients. Under the proposed legislation, these pharmacies would be prohibited from copying widely available, FDA-approved drugs in their compounded medications.

Investing ideas

If Congress passes the Drug Quality and Security Act, pharmaceutical companies may see increased sales due to this restriction, which would bar compounding pharmacies from copying their drugs. This inspired us to look for investment opportunities among pharmaceutical stocks for our following screen.

To begin, we constructed a universe of stocks belonging to biotechnology and drug manufacturing industries. We then screened that group for stocks with rising gross profit margins year-over-year for the last three years.

Gross margin is the percentage of profit a company makes for each dollar it generates in sales, after deducting production expenses. Examples of these expenses include operating costs, payroll, and taxes.

Gross Margin = Gross Profit / Revenue

The higher the percentage, the greater the gross profits a company takes from its revenue. When a company has rising gross margins, it indicates that the firm is in control of its costs.

We then narrowed down that list to companies with FDA-approved drugs on the market. This left us with three pharmaceutical stocks on our list.

Click on the interactive chart below to see sales data over time.

Do you expect these stocks to continue to see rising gross margins if Congress passes the Drug Quality and Security Act? Use this list as a starting point for your own analysis.

1. Forest Laboratories Inc. ( FRX): Develops, manufactures, and sells branded and generic forms of ethical drug products.

Market cap at $13.23B, most recent closing price at $50.44.

Gross profit margins increased from 76.03% to 77.26% during the first time interval (12 months ending 2011-03-31 vs. 12 months ending 2010-03-31). For the second time interval, gross margins increased from 77.26% to 77.4% (12 months ending 2012-03-31 vs. 12 months ending 2011-03-31). And for the final time interval, gross margins increased from 77.4% to 78.21% (12 months ending 2013-03-31 vs. 12 months ending 2012-03-31).

Forest Laboratories sells drugs under two segments: Central Nervous System Franchise and Respiratory Franchise.
 

2. Allergan Inc. ( AGN): Operates as a multi-specialty healthcare company primarily in the United States, Europe, Latin America, and the Asia Pacific.

Market cap at $27.19B, most recent closing price at $94.80.

Gross profit margins increased from 83.33% to 85.32% during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, gross margins increased from 85.32% to 86.18% (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, gross margins increased from 86.18% to 86.7% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

Allergan's FDA-approved products include ALPHAGAN, COMBIGAN, and LUNIGAN for glaucoma and other eye conditions as well as BOTOX for overactive bladder, migraines, and several other medical conditions.
 

3. Bristol-Myers Squibb Company ( BMY): Develops, and delivers innovative medicines that help patients prevail over serious diseases.

Market cap at $86.48B, most recent closing price at $51.86.

Gross profit margins increased from 72.67% to 72.92% during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, gross margins increased from 72.92% to 73.65% (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, gross margins increased from 73.65% to 73.84% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

The company's rheumatoid arthritis treatment, ORENCIA, posted double-digit gains in the most recent quarter, helping to drive up net sales.

 

 

( List compiled by Mary-Lynn Cesar, a Kapitall Writer. Gross margin data sourced from Google Finance. Quarterly sales data sourced from Zacks Investment Research. All other data sourced from Finviz.)

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