Pharmaceutical Winners And Losers In Early 2013: Johnson & Johnson (JNJ), Sanofi SA (ADR) (SNY), Teva Pharmaceutical Industries Ltd (ADR) (TEVA)

Scandal at
Johnson & Johnson

Johnson & Johnson (NYSE:JNJ) is facing up to 10,000 lawsuits after it designed an all-metal hip implant that allegedly failed the company’s own safety test. The company allegedly changed the testing protocol instead of fixing the flaw. Legal consequences could potentially cost J&J billions of dollars. Loren Kransky, a retired prison guard, filed the first of the myriad of lawsuits against the healthcare company, claiming defective design, failure to warn and negligent recall over the ASR XL hip he had replaced last year.

Even as J&J recalled nearly 93,000 ASR hip implants in 2010 once they reported the prosthetic had a 12% five-year failure rate, Australian data from last year concluded that the failure rate was actually of 22% after five years, with an increase to 44% when tested in a 7 year period of time. An epidemiologist at Dartmouth Medical School testified, “The ASR XL total hip replacement fails at a much higher rate than a typical hip replacement.” On the other hand, internal documents from J&J also show a failure rate of 37% in less than 5 years.

Valuations of troubled stocks

Finally, let’s consider the valuations of the stocks suffering bad news:

Yes, Eli Lilly is the cheapest stock based on static price-to-earnings valuations. Bear in mind that it should be cheap based on the news, and it should also be cheap based on analyst estimates for future growth. Hence, it is no deal. Instead, investors should consider Sanofi as a better alternative since it has a comparable price-to-earnings ratio, a comparable price-to-sales ratio, and positive growth estimates. Teva, arguably the cheapest stock on this list based on cash flows and sales. It is definitely cheaper than Johnson & Johnson (NYSE:JNJ), whose valuation makes little sense in light of its scandal.

Conclusion

Investors should consider Teva and Sanofi as buy candidates and should be perplexed and even entertained by Jonhnson & Johnson’s valuation.

The article Pharmaceutical Winners And Losers In Early 2013 originally appeared on Fool.comand is written by Bill Edson.

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