Abbott Laboratories (ABT), Eli Lilly & Co. (LLY): Healthcare Stocks to Consider Buying

Note: This article has been amended to remove TRADJENTA as Eli Lilly & Co. (NYSE:LLY)’s leading products–it is developed and commercialized through an alliance between Eli Lilly and Boehringer Ingelheim International GmbH & Co

To address the patent cliff, several large pharmaceutical companies have been actively reinventing their businesses in terms of pipeline updates and strategic changes. Below, I present my take on two leading producers with a focus on the headwinds and opportunities.

Unlocking value

Last year, Abbott Laboratories (NYSE:ABT) made the bold decision to split into two distinct trading companies. Investors and analysts have been keen to see what has come of the spinoff. AbbVie Inc (NYSE:ABBV), which split from Abbott Laboratories (NYSE:ABT), has been paying attractive dividends with a yield of 3.7% and a projected EPS growth rate of 11% in the next five years. A rising concern about the company is the ticking clock for its drug Humira.

The drug has generated enormous amounts of revenue for the company in the past years with 2012 alone registering sales worth $9.3 billion. The problem is that patent rights to the drug will expire in 2016. After 2016, generic forms of the drug will be available. This means that sales will drop greatly as other companies attempt to get a share of the cake.

Abbott Laboratories (NYSE:ABT) has fared well after the split–beginning with a bang: the diagnostic segment grew 15.8% compared to the same period a year earlier. Ultimately, I see this segment representing the company’s future. Toward that end, the company should consider takeover activity.

St. Jude Medical, Inc. (NYSE:STJ), for example, is an attractive potential target. At 12x forward earnings, it is cheap compared to peers. At the same time, it would mitigate downside by offering a more predictable stream of free cash flow. St. Jude Medical, Inc. (NYSE:STJ) has grown by a rate of nearly 10% over the past five years and is expected to do so over the next five years. While this transaction is very unlikely, I believe a similar buyout will be made by Abbott Laboratories (NYSE:ABT) to increase stability.

Facing headwinds for Eli Lilly & Co. (NYSE:LLY)

Eli Lilly & Co. (NYSE:LLY) is a diversified pharmaceutical company that has a presence in around 130 countries. The company reported that it had made several breakthroughs in the introduction of new drugs. In Europe, the Cialis drug was approved by the European commission for treatment of BPH symptoms. Amyvid was also approved for the treatment of cognitive impairment in adults with Alzheimer’s disease and other diseases known to cause cognitive impairment.

Erbitux received approval in Japan for treatment of neck cancer. The same drug, taken together with certain chemotherapy regiments, was also approved in Canada as the first treatment for colorectal cancer.