Portfolio Review

10/5/2009


Merger rumors lift AstraZeneca

AstraZeneca ($45; AZN) has risen in recent days on speculation that Novartis ($49; NVS) could be mulling a takeover bid. Renewed merger activity among drugmakers has kindled speculation that Novartis may be interested in AstraZeneca, which has a stock-market value of more than $65 billion. Even if the takeover chatter subsides, AstraZeneca represents an appealing pick on its own merits.

In other news, more than 15,000 patients are suing AstraZeneca for allegedly withholding information that Seroquel was linked to diabetes. AstraZeneca says such a link has not been established. The legal squabble did not prevent the European Union from approving Seroquel as a treatment for preventing the recurrence of bipolar disorder. Seroquel, AstraZeneca’s second-biggest drug, generated $4.45 billion in sales last year.

In a clinical trial, AstraZeneca’s experimental anticlotting drug Brilinta outperformed a key rival as a treatment for patients undergoing procedures for heart attacks and chest pain. AstraZeneca plans to file for regulatory approval by the end of the year. The stock is a Buy and a Long-Term Buy.

J&J restocking drug pipeline

Johnson & Johnson ($61; JNJ) agreed to buy an 18% stake in Dutch vaccine-maker Crucell ($23; CRXL) for about $443 million as part of an agreement to develop an influenza vaccine. The deal should dilute J&J’s 2009 earnings by no more than $0.04 per share.

Internal research has also contributed to the broadening of J&J’s drug portfolio. Both U.S. and United Kingdom regulators approved psoriasis drug Stelara, which requires fewer injections than competing treatments. Separately, J&J’s Yondelis, designed to combat ovarian cancer, was endorsed by an influential European medical committee, usually a precursor to European Commission approval. U.S. regulators have rejected the drug on concerns about heart and liver toxicity.

In other news, Boston Scientific ($11; BSX) said it will pay J&J $716 million to settle 14 patent lawsuits concerning coronary stents and other heart devices. J&J is a Buy and a Long-Term Buy.

Microsoft antitrust update

Nearing the end of a protracted European Union antitrust investigation into Microsoft’s ($26; MSFT) bundling of its Internet browser with its Windows operating system, the software giant has offered an olive branch. Microsoft, which has been fined more than $2 billion for antitrust violations by the EU since 2004, has created a screen allowing users to choose between five browsers. Rival companies are not happy with the design of the ballot screen, but a compromise appears likely. In other news, Microsoft dispelled rumors that it was considering acquiring video-game designer Electronic Arts ($19; ERTS). Microsoft is a Long-Term Buy.

Mergers and deals

Transocean ($86; RIG) won a three-year, $544 million contract extension for an ultra-deepwater semisubmersible rig. Transocean is a Focus List Buy and a Long-Term Buy.

Xerox ($8; XRX) became the latest technology company to plunge into the high-margin outsourcing market with its plan to acquire Affiliated Computer Services ($55; ACS), a rival of Accenture ($37; ACN), for $5.5 billion. Accenture’s stock jumped 5% on the news, but its market capitalization of $22.8 billion makes it too big for many suitors. Accenture, expected to report earnings Oct. 1, is a Buy and a Long-Term Buy.

Hospira ($45; HSP) will acquire the global rights for a biosimilar version of filgrastim, a drug produced by Amgen ($60; AMGN) that boosts white blood cells. Hospira is a Focus List Buy and a Long-Term Buy. Amgen is rated Neutral.

Abbott Laboratories ($49; ABT) agreed to buy the drug unit of Belgian plastics and chemicals maker Solvay for $6.6 billion cash, with milestone payments that could push the final price to $7.1 billion. The company expects the deal to boost per-share earnings by $0.10 in 2010. Abbott Labs is rated Neutral.

Kraft Foods ($26; KFT) is reportedly preparing a hostile bid to acquire Cadbury ($51; CBY) for about $17.4 billion in cash and stock after the British confectioner rejected a $16.7 billion offer last month. Kraft is rated Neutral.

Corporate review

The Food and Drug Administration confirmed three new cases in which patients treated with Biogen Idec’s ($51; BIIB) multiple sclerosis drug Tysabri contracted a rare brain infection, pushing the count to 13 since mid-2006. In other news, Biotechnology Value Fund, Facet Biotech’s ($17; FACT) largest institutional investor with a 15% stake, said it will not tender shares at Biogen’s current takeover bid of $14.50 but suggested it would consider a higher offer. Biogen is a Focus List Buy and a Long-Term Buy.

Walgreen ($37; WAG) earned $0.44 per share in the August quarter, dipping 2% but topping the consensus estimate by a nickel. The drugstore chain had fallen short of the consensus in the last three quarters, and the shares jumped 9% on the good news. Sales rose nearly 8% to $15.70 billion, with same-store sales up 2.4%. Walgreen is rated Neutral.

Boeing ($55; BA) and Northrop Grumman ($53; NOC) are bidding on a $35 billion contract to build midflight refueling tankers for the U.S. Air Force. This marks the Air Force’s third attempt to award this contract. Separately, Boeing is repairing the structural flaws that have grounded the long-awaited 787 Dreamliner, and the plane could take its first test flight as early as late October. Boeing is rated Neutral.

Hewlett-Packard ($47; HPQ) expects per-share profits of $4.20 to $4.30 excluding special items in fiscal 2010 ending October, implying at least 17% growth. In other news, published reports suggest H-P is considering merging its printing and personal-computer divisions into a single unit. Hewlett-Packard is a Buy and Long-Term Buy.

Ecuador criticized Chevron’s ($71; CVX) filing of an arbitration claim in a long-running lawsuit. The arbitration filing could force the country to shoulder partial liability in the $27 billion environmental lawsuit. Ecuador also named a new judge to hear the Chevron case after the previous one quit over bribery allegations. In other news, Chevron CEO Dave O’Reilly said he will retire at the end of the year. Vice Chairman John Watson will take the reins. Chevron is a Long-Term Buy.

News digest

NII Holdings ($30; NIHD) said Mexican mobile-phone companies could lose up to 5 million customers if the government enacts a proposed 4% telecommunication tax. NII is the smallest of four mobile-phone companies operating in Mexico. NII Holdings is a Focus List Buy.


Japan’s Fair Trade Commission told Qualcomm ($46; QCOM) to rework cross-licensing agreements that give the company free access to patents held by Japanese manufactures. Qualcomm is a Long-Term Buy.


Lockheed Martin ($79; LMT) hiked its quarterly dividend 11% to $0.63 per share, payable Dec. 31. Lockheed is rated Neutral.


McDonald’s ($57; MCD) raised its quarterly dividend 10% to $0.55 per share, payable Dec. 15. McDonald’s is rated Neutral.

  RANK CHANGES
No changes were made this week in Dow Theory Forecasts.

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