Big Predictions For Big Pharma

Johnson & Johnson (NYSE: JNJ)
J&J has its finger in so much of the healthcare pie that there are few people in the world who have not been a customer in some way or another. The healthcare giant is taking advantage of the rough global economy to buy assets on the cheap. In November it snapped up surgical product maker Omrix Biopharmaceuticals (Nasdaq:OMRI) for less than half a billion dollars. And in December it bought Mentor (NYSE:MNT), a manufacturer of breast implants and body contouring equipment, for a little over $1 billion. Sitting on a $15 billion cash treasure chest, Johnson & Johnson has the financial firepower to make similar moves in the coming year. With a generous dividend yield and a highly diversified revenue stream, there is a lot to like about Johnson & Johnson.

Abbott Labs (NYSE:ABT)
For investors with a long-term horizon, Abbott Labs could be a remedy for an ailing portfolio. Abbott's third-quarter sales this year soared 18% to $7.5 billion, boosted by autoimmune disorder drug Humira and drug-coated metal stents for heart-related surgery. About half of Abbott's third-quarter sales were international. A wide range of products and geographic revenue reduces Abbott's overall risk. Importantly, rather than scaling back on potential products, Abbott in its third quarter spent $680 million on research and development, or 6.2% more than in the same time last year. At the same time, Abbott, which bought the vascular-device unit of medical-device maker Guidant in 2006, is keeping watch for more acquisitions during the downturn.

Pfizer (NYSE:PFE)
With Lipitor, its marquee cholesterol drug, coming off patent in 2011, the drug giant has just three years to replace more than a quarter of its total sales. The stock has taken a beating. Deeply discounted, the stock price doesn't account for the buckets of cash Pfizer produces. Pfizer's whopping dividend ranks it at the top among its peers. Admittedly, it's hard to make out any big blockbusters emerging in the next year or two, but Pfizer has 16 compounds in phase III trials and expects to have as many as 26 in phase III by the end of 2009; 15-20 drugs are due to be submitted for FDA between 2010 and 2012. Pfizer is also putting its $26 billion cash balance to snap up drug makers. (For further reading, see Measuring The Medicince Makers)

GlaxoSmithKline (NYSE:GSK)
Like J&J, Glaxo has a highly diversified, global revenue base. Of the global pharmaceutical companies, Glaxo is in one of the best positions to handle the current environment of expiring patents on existing drug, as well as pricing pressure on drugs due to payers cutting costs via generic competition. Glaxo is having success in milking more out of the so-called emerging markets such as India and China, and has a broad pipeline of drugs under development. This could be the year that GlaxoSmithKline finally wins FDA approval for its vaccine, Cervarix, for sexually transmitted disease and cervical cancer. (For related reading, see Investing In The Healthcare Sector)

Bottom Line
Big cash balances and big dividends are two key things investors should look for in drug stocks. Investors can rest easier knowing that the Big Pharma companies they own are well capitalized to pursue growth acquisitions while still paying shareholders an attractive return.