The biggest pharmaceutical companies in the United States are in an enviable position. They sell products that are literally a matter of life and death. People who take medication will pay for it no matter what, and will often cut back on many other necessary expenses if need be.
As a result it should be no surprise that some of the market’s best performers last year came from the large-cap pharma space.
Pharmaceutical giants Bristol Myers Squibb Co. (NYSE:BMY) and Eli Lilly & Co. (NYSE:LLY) are both up more than 30% over the tailing 52 weeks. Industry heavy-weight Pfizer Inc. (NYSE:PFE), one of the biggest companies in the world and a Dow 30 component, has also climbed 30% over the past year. Consider, also, that these fantastic returns don’t even include the generous dividend yields that large-cap health care stocks are known for.
Should investors continue to pile into Pfizer Inc. (NYSE:PFE) at these levels? Or, on the other hand, are you better off sitting on the sidelines?
Rising valuations and falling sales are causes for concern
The spiking share prices among these stocks are confusing given the struggling underlying performance of many of these firms. For example, Bristol Myers Squibb Co. (NYSE:BMY) reported full-year 2012 net sales that were 17% lower than the previous year. Likewise, Eli Lilly & Co. (NYSE:LLY) reported that full-year 2012 revenues declined 7% year over year.
For Pfizer Inc. (NYSE:PFE)’s part, the company’s 2012 sales declined 10% year over year, which management blamed mostly on the patent loss of its blockbuster cholesterol drug Lipitor.
Pfizer Inc. (NYSE:PFE) is experiencing both struggling sales and rising expenses as it scrambles to replace its best-selling drug ever. This is a dangerous combination, especially in light of the lofty valuation it now enjoys due to its impressive share price performance over the past year.
To illustrate, Pfizer Inc. (NYSE:PFE)’s first-quarter sales fell again, this time by 9% year over year. On top of that, the company cut its outlook for full-year 2013. The company now expects diluted earnings per share to come in between $1.44 and $1.59, down from its previous expectations of $1.50 to $1.65 per share. At current prices, Pfizer Inc. (NYSE:PFE) trades for 19 times the midpoint of its revised outlook.
Wait for a pullback
Many stocks within the pharmaceutical industry have rallied significantly over the past few years and now sit at multi-year highs. It’s not hard to understand why: in today’s investing environment of historically low interest rates, bank products like certificates of deposit pay little to no interest. The 10-Year U.S. Treasury Bond still yields just 2.2%, so high-quality equities like these stocks that provide yields in excess of 3% must seem extremely attractive to income investors hungry for yield.