Portfolio Review


AmerisourceBergen on Focus List, J&J off

AmerisourceBergen ($22; ABC) is replacing Johnson & Johnson ($60; JNJ) on the Focus List. J&J’s growth has slowed in recent quarters, and its Quadrix scores have declined. The company should add several new drugs to its portfolio this year, but looming patent expirations could limit the stock in the near term.

A distributor of pharmaceuticals and other medical products, Amerisource has better growth prospects. Wall Street forecasts the company will increase per-share profits 14% in fiscal 2009 ending September and 10% in fiscal 2010.

Amerisource earns a Quadrix Value score of 89 and trades at just 13 times trailing earnings, 13% below the three-year average. Amerisource is also a Long-Term Buy. J&J is being dropped from the Focus List but remains a Buy and a Long-Term Buy.

J&J reworks deal to appease Biogen

Johnson & Johnson ($60; JNJ) and Elan ($8; ELN) reworked a partnership agreement to address a legal complaint lodged by Biogen Idec ($51; BIIB). Under a previous $1.5 billion deal, Elan appeared to give J&J its option to acquire Biogen’s stake in multiple sclerosis (MS) drug Tysabri should Biogen be purchased. A court ruled the deal violated an existing agreement between Biogen and Elan, so the new partners altered their arrangements. The new deal, cheaper by $115 million, strikes all agreements relating to Tysabri.

Tysabri has found itself at the center of another dispute. A study found the drug can lower patients’ immune defenses, leaving their brains vulnerable to a potentially deadly virus called progressive multifocal leukoencephalopathy (PML). Tysabri use has already been connected to PML. The drug prevents T cells from migrating to the brain, where they can mistakenly destroy nerve tissue, causing MS symptoms. But the study suggests these T cells also protect against PML.

Two more PML cases have been announced since July, and most cases have occurred in patients taking the drug for more than a year. However, Biogen said it is too early to conclude that long-term Tysabri therapy heightens the risk of PML. In other news, Fampridine, a drug Biogen markets outside the U.S., was found to improve the walking speed of MS patients. Also, Biogen’s MS and cancer treatment Avonex won a patent extension through 2026, 13 years after other patents expire. Biogen is a Focus List Buy and a Long-Term Buy. J&J is a Buy and a Long-Term Buy.

Health-care report

AstraZeneca ($45; AZN) received FDA approval for a swine flu vaccine. Separately, AstraZeneca filed for a summary judgment in a challenge to the company’s patent for blockbuster cholesterol drug Crestor. AstraZeneca is a Buy and a Long-Term Buy.

U.S. regulators approved a St. Jude Medical ($38; STJ) system that helps physicians diagnose and treat abnormal heart rhythms. St. Jude Medical is a Long-Term Buy.

With patent expirations looming, Eli Lilly ($33; LLY) plans to lower annual costs $1 billion by trimming its work force 14% over the next two years. Lilly is rated Neutral.

A mistrial was declared in a federal lawsuit involving Merck’s ($33; MRK) osteoporosis drug Fosamax, which has allegedly caused jaw problems. Merck is rated Neutral.

The Senate Finance Committee is calling for medical-device makers to pay $40 billion, based on market share, over the next 10 years to help cover costs of health-care reform.

Technology review

Oracle’s ($23; ORCL) per-share profits for the August quarter rose 3% to $0.30 excluding special items, in line with the consensus. Sales fell short of expectations, dipping 7% to $5.05 billion excluding acquisition-related accounting adjustments. Sales would have fallen just 2% in constant currency. Revenue from new software licenses dipped 17% to $1.03 billion, while sales of software license updates and support grew 3% to $3.12 billion excluding the accounting adjustments. Oracle is a Buy and Long-Term Buy.

A court ruled Microsoft ($25; MSFT) does not have to pay $358 million in damages to Alcatel-Lucent ($4; ALU) over the infringement of a patent, though the judges affirmed the underlying verdict against Microsoft. Separately, the U.S. Justice Department asked for more details into Microsoft’s proposed search deal with Yahoo ($16; YHOO) in an effort to determine if the agreement will hinder competition. Microsoft is a Long-Term Buy. Yahoo is rated Neutral.

Google ($478; GOOG) faces mounting opposition to a proposed $125 million settlement with book publishers and authors that grants the software firm the digital rights to millions of out-of-print books still under copyright. Google, which has already scanned 10 million books, plans to sell digital subscriptions to libraries and individual copies to consumers. Google is rated Neutral.

Seeking to broaden its product portfolio, CA ($22; CA) agreed to acquire NetQoS for $200 million in cash. NetQoS software repairs problems in computer networks. CA is a Focus List Buy and a Long-Term Buy.

Corporate roundup

A wave of positive corporate guidance has washed over the market in recent days, helping push stocks higher. Bellwether FedEx ($80; FDX) hiked per-share-earnings guidance for the August and November quarters on stronger international shipments. IBM ($119; IBM) reaffirmed annual per-share-profit guidance of at least $9.70 and said it remains “well ahead of pace” to meet its 2010 goal of $10 to $11. Cognizant Technology Solutions ($37; CTSH) said, “The trend towards increased demand for our services, which we observed in the second quarter of this year, has continued into the third quarter.” That statement suggests upside to earlier September-quarter profit guidance of $0.44 per share. Transocean ($83; RIG) foresees more deepwater contracts on the horizon and improvement in the midwater business now that oil prices are stabilizing near $70 per barrel. IBM, Cognizant, and Transocean are Focus List Buys and Long-Term Buys. FedEx is rated Neutral.

Chevron ($72; CVX) gained final approval from the Australian government to begin work on the Gorgon liquefied-natural-gas field, expected to produce 40 trillion cubic feet of gas. Chevron owns a 48% stake in the project, while Royal Dutch Shell ($58; RDSa) and Exxon Mobil ($69; XOM) own most of the rest. The trio have already reached sales agreements worth an estimated $124 billion over 20 years after gas shipments begin in 2014. The Gorgon project is expected to generate more than $250 billion in gas exports and deliver about 8% of the world’s liquefied natural gas annually. Chevron is a Long-Term Buy. Exxon Mobil is a Long-Term Buy.

Following successful trial and regional programs, Wal-Mart Stores ($50; WMT) will take its mail-order drug program nationwide. Wal-Mart Stores is a Long-Term Buy.

AmerisourceBergen ($22; ABC) is being added to the Focus List. Johnson & Johnson ($60; JNJ) is being dropped from the Focus List but remains a Buy and a Long-Term Buy. The target weighting for stocks on the Buy List is being raised slightly to 2.8%. This brings the weighting of the Vanguard Short-Term Investment-Grade ($10.51; VFSTX) fund to 30%, in line with the cash position we have been recommending on in Market Commentary in recent weeks.

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