Johnson & Johnson (JNJ), Merck & Co., Inc. (MRK), Pfizer Inc. (PFE): A Buy Despite Negative News

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Pfizer Inc. (NYSE:PFE) is the largest healthcare company in the world in terms of market capitalization. It has one of the strongest pipelines in the healthcare sector and a number of drugs in the last stages of clinical trials. In the last six months Pfizer stock has appreciated by 17%. This might seem insignificant for smaller biopharmaceuticals, but for a company such as Pfizer, it is a huge rally. This is because stocks such as Pfizer have little risk and investors usually buy them for their high dividend growth, which makes such a high return a bonus. The company currently offers a stellar dividend yield of 3.4% and any capital appreciation is an additional bonus for investors.

Pfizer Inc. (NYSE:PFE)

Competition

Johnson & Johnson (NYSE:JNJ) and Merck & Co., Inc. (NYSE:MRK) are among the top healthcare companies in the world. During the last six months their stock price has appreciated by 14% and 2%, as compared to the 17% appreciation in Pfizer Inc. (NYSE:PFE)’s stock price. As the chart below shows, all three companies are almost neck to neck in terms revenue growth but J&J has shown slightly better revenue growth in the last year or so.



JNJ Revenue Quarterly data by YCharts

However when it comes to EPS growth, the chart below shows, that Pfizer Inc. (NYSE:PFE) has shown consistent improvement over the last year. Merck & Co., Inc. (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ) have seen declining or stable EPS in the same period.

Merck provides the highest dividend yield amongst the three rivals at 4% and Pfizer is pretty close behind with 3.4%. J&J has the lowest dividend yield amongst the three giants at 3.2%.



JNJ EPS Diluted Quarterly data by YCharts

Last year Merck generated approximately $10 billion from operations i.e. an operating cash flow yield of 7.5%. On the other hand Pfizer has an operating cash flow yield of 8.3%, making the dividends of Pfizer more secure. This also means that Merck & Co., Inc. (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ) have a higher chance of leveraging their dividends are compared to Pfizer Inc. (NYSE:PFE).

Bad News

As the discussion above shows, the stock price of Pfizer has been on a consistent rise since the last few months and the market is expecting more good things from the company’s pipeline. Amongst all these positives, Pfizer has received FDA criticism on its major drug Zithromax. According to the governing body, the popular antibiotic can result in irregular heart rhythms. This all started with a recent study conducted by New England Journal of Medicine which suggested that patients who were using Zithromax had a higher rate of fatal heart rhythms. These higher rates can result in a fatal heart rhythm called QT interval.

FDA has advised the medical community to avoid the use of this drug in patients which have slower heart rates, have arrhythmia, or low levels of potassium or magnesium. However, this warning is not only restricted to Zithromax but all other generic alternatives in the same class. This can be a blow to Zithromax’s sales which are approximately $450 million. If we use a P/s of 3.4x, the share price impact from the total loss of Zithromax sales can be somewhere in the range of $1.5 per share.

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