The "Ethical" Drug Stock Pix (aka Big Pharma)

Yesterday we looked at the ugly ducklings comprising the wholesale/distributor and generic segments of the drug sector and found little to recommend. Today will be a different story as there are many beaten down companies that deserve our attention. I mentioned that before yesterday, the drug sector had been on a stealth rise and was perched in the number 12 spot. Because of yesterday's across the board gains, the sector not only made the Top 10 list but the Top 5 list as well. Yep. It's now Number 5 with a bullet. I can't guess how much higher it can go--trying to topple the utilities and petroleum sectors will be no small feat. But the drug sector isn't the only one that has done well as of late; so has its partner, the healthcare sector, which is currently sitting in the number four spot. (FYI, the Market sector composed of long and short ETFs holds the number three position.) Healthcare is a subject best left for another time for today we're going to be judging the best of breed in one of the other two remaining drug sector industries: the Ethical drug makers (don't ask me how the term “ethical” came to denote big pharma). Biotechs, the last industry, is left for tomorrow.

The Beautiful Swans, Part I: The “Ethical” Drug Makers
This industry covers most of the major drug makers and it also includes some of the smaller ones. First on the list is Vivus (VVUS). This stock was a darling ten years ago when it was trading over $40/share. The company develops and markets sexual dysfunction drugs for both men and women. In 1997, it came out with Muse, an erectile dysfunction drug. A short time later, Pfizer introduced Viagra which not only killed the market for Muse but for the stock, too. In just one year, Vivus lost over 90% of its value, trading under $3. However, since the middle of 1995 its been upward bound and is now trading just over $8. Its Qnexa drug is in stage III clinical trials for obesity and in stage II trials for diabetes. The results look promising. They also have a couple of other sexual dysfunction drugs in clinical trials and recently sold a menopause treatment to K-V Pharmaceuticals in May, 2007 which gave the stock a nice boost on the behind. Today, it's looking a tad overextended; I'd wait for a pull-back before placing my chips on the table. One cause for concern is that insiders have been selling quite a bit of stock over the past year. Is there something they know that we don't?

After losing nearly 50% of its value since fall 2006, AstraZeneca (AZN) made an about-face in the middle of March and is now trading at $48, nearly 37% above that low. This is one darn fine company, rated a 10 by the MSN Money Stock Scouter. Among many of its successful and lucrative products include the highly publicized Nexium and Crestor. The stock recently broke above its 50dma on a weekly chart--a positive technical event that signals a continued rise in price. Another good sign is that the company has been steadily increasing its dividend which now stands at $1.82 annually for a 3.9% dividend yield.

Other stocks that are rising from the ashes are Schering-Plough (SGP), King Pharmaceuticals (KG), and Novartis (NVS). I like the price action on the first two but am a bit hesitant about recommending Novartis. Sure, its price has increased by nearly 24% in the past several months but this is exactly the reason I'm being standoffish--at least for the moment. Its chart is looking toppy and I'd like to see it take a break before entering a trade. The other two companies have been steady eddies, and their consistent price pattern is something I find more reassuring. Schering blew out last quarter's estimates and is reporting good phase III test results with its hair follicle stimulating drug. King Pharmaceuticals is recovering from a two-year low. It recently broke heavy resistance at $10 and is rising steadily. The fundamentals on this company seem to be lackluster, but they did beat analysts' estimates for the past two quarters. I'm recommending this stock purely on the basis of its chart action.

There are three other stocks here that have been doing exceptionally well: Elan (ELN), Wyeth (WYE), and Valent (VRX). The reason that I'm not giving them two thumbs up is that they all look over-extended and are likely due for a breather, but I'd keep them on a watch list.

Summary
My plan for today was to include the biotechs but there are literally hundreds of companies in this group and it's taking me much longer to analyze than I had expected. Tomorrow I promise this will all be wrapped up, but you won't be disappointed 'cause there's quite a few sexies in the lineup.

Trading Note: I'm seeing large topping tails on the the PPH and the BBH (the pharmaceutical and biotech ETFs) and in many of the drug stock charts. This generally bodes ill for continued upward movement in the short-term. Keep this in mind if you're looking to buy either the ETFs or some of the underlying stocks. Patience, in this case, is a virtue and will ultimately be rewarded.