I wouldn’t recommend investing in Shire because even if it has a good drug like Vyvanse (which treats ADHD), the drop in sales from Adderall XR and other drugs still caused Shire to post only a 1% revenue gain in the first quarter. Additionally, if you factor in the study, if these drugs turn out to be not as effective as previously thought then Shire is in for a sharp drop. Shire also pays out a small 0.9% dividend, and there simply are better pharma stocks to invest in that pay out much bigger dividends and offer safer growth.
Big, slow, and profitable
Novartis AG (ADR) (NYSE:NVS) is a huge pharma company that pays out a 3.6% dividend. At a PE of 18.3, with little to no revenue growth and 5-7% EPS growth, Novartis AG (ADR) (NYSE:NVS) is currently overvalued. If it was a little cheaper then it would be worth looking into as a dividend play, but at this price it simply is too expensive. It offers little capital gains and a dividend which is smaller than its peers.
Novartis AG (ADR) (NYSE:NVS) has only a little exposure to the ADHD sector, so they won’t get really hurt if the study turns out to be true, but they need more top line growth going forward. I would recommend Novartis over Shire, but there are better pharma stocks out there than both of those companies.
Another way
ADHD drugs are also sometimes used to treat narcolepsy, but Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) has found a better way to treat narcolepsy with its blockbuster drug Xyrem. Xyrem competes with drugs like Prozac, and works much better than using amphetamines to keep patients awake if they suffer from narcolepsy.
Xyrem sales have been very strong, with sales rising from $220 million in 2011 to almost $400 million in 2012. In the first quarter of 2013, Xyrem sales were up 60% year over year. Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) also sells the drug Erwinaze, which has exclusivity in the U.S. until 2018 with orphan drug status. Erwinaze showed sales growth of 27.1% in the first quarter year over year.
Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) trades at a PE of 16.1 and is expected to grow its EPS by 16-17% over the next several years. With strong sales growth and continuous upward guidance revisions, like the revision for 2013 earnings to be $6.10 – $6.30 from $5.70 – $5.90, Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) looks like a solid growth story over the next few years. Bullish on Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ).
Final thoughts
I’m not saying that the Quebec study that the Wall Street Journal brought up is correct or that I’m an expert. What I am saying is that Shire is heavily exposed to the ADHD market and that if the study turns out to be right, combined with increased generic competition for one of its best selling drugs, Shire’s stock will get hammered. Not to mention that it is estimated that 15-20% of all ADHD drugs sold are used by those without a prescription (according to the study). If parents crack down on their kids selling their medication then sales will definitely get hit.
For Novartis, it simply isn’t growing fast enough for my liking, and I wouldn’t recommend it. Even with a forward PE of 13, there are better dividend plays out there (look for stocks yielding over 4%) that are going to grow faster and pay out more money. Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) has a long growth runaway ahead of it, and is worth taking a look at if you want a nice pharma growth play with a company that has a $4 billion market cap.
Callum Turcan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Callum is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Don’t Let Your Attention Defect originally appeared on Fool.com is written by Callum Turcan.
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