3 Big Pharma Stocks With More Free Cash Flow Than Gilead Sciences Inc.

By Markets Fool.com


Source: U.S. Army RDECOM via Flickr

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Over the past decade Gilead Sciences has transformed into a veritable pharmaceutical powerhouse, growing its sales from $1.32 billion in 2004 to an estimated $24.3 billion in 2014. That's a compound annual growth rate of 33.8%, in case you were interested.

Although Gilead has a broad portfolio of products spanning a wide gambit of infectious diseases, and even includes cardiovascular and oncology products, the bulk of its growth prospects lie with a trio of approved drugs: Harvoni, Sovaldi, and Stribild.

Source: Gilead Sciences

Sovaldi and Harvoni are Gilead's once-daily pills designed to treat hepatitis C. Sovaldi can be administered to genotype 2 & 3 patients without the need for interferon, while Harvoni (a cocktail drug combining Sovaldi and ledipasvir) is given to genotype 1 HCV patients -- roughly 75% of all HCV cases are genotype 1 -- without the need for interferon or a ribavirin. Eliminating these "extras" dramatically reduces the unpleasant side effects previously witnessed with HCV treatments, and it represents a big improvement in convenience. For most HCV-1 patients taking a single pill a day for eight to 12 weeks is a godsend compared to the standard of care even four years ago that meant regular infusions.

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Stribild is also important to Gilead's success. Stribild is the company's newest HIV-1 drug. HIV can't be cured, but Stribild is designed to slow its progression. Considering that HIV/AIDS is still the No. 1 infectious disease killer around the globe there's plenty of market opportunity for Stribild to dramatically change people's lives. Best of all, Stribild is a four-in-one pill, with all four components coming from in-house. Gilead's prior HIV-1 solution, Atripla, was a three-in-one pill where revenue and profits were split three ways since three separate companies supplied the components of the pill.

Altogether the rapid growth of these drugs (note: Harvoni was only approved in October so it hasn't officially contributed to specific quarterly sales totals yet) has allowed Gilead over the trailing 12-month period to crest $10 billion in free cash flow generation for the first time in its history thanks to its robust margins.

Amazingly, though, Gilead's $10.1 billion in trailing free cash flow isn't the highest in the pharmaceutical industry. There are three big pharma stocks generating even higher cash-flow amounts. Knowing which companies these are can be worthwhile since high levels of free cash flow often means a company is on solid financial footing, may be able to pay a dividend to shareholders, and is easily able to reinvest back into its product pipeline without resorting to debt offerings.

Here are three big pharma stocks for you to keep on your radar with higher free cash flow over the trailing 12-month period than Gilead.

1. Pfizer
Sometimes bigger really is better! Pfizer isn't nearly as efficient at turning its revenue dollars into free cash flow, but it nonetheless has produced more than $15 billion in positive free cash flow over the trailing 12-month period according to S&P Capital IQ. Mind you, this includes its ongoing struggles with the patent cliff and the loss of exclusivity on key drugs like cholesterol-lowering medication Lipitor and anti-inflammatory therapy Celebrex this decade.

Pfizer's free cash flow may be about to pick up if the company's first-line estrogen-positive, HER2-negative breast cancer drug palbociclib is eventually approved by the Food and Drug Administration. In the PALOMA-1 study it improved progression-free survival from 10.2 months in the control group to 20.2 months, and it ultimately boosted overall survival by 4.2 months to 37.5 months compared to the control group's overall survival of 33.3.


Source: Pfizer

Having such robust cash flow affords Pfizer the ability to buy back its shares in bulk and to pay out healthy dividends. Between 2011 and 2013 Pfizer returned a whopping $53 billion to shareholders in the form of buybacks and dividends. Don't be surprised if this shareholder-centric approach to creating value continues for many years as Pfizer grapples with ways to reinvigorate its growth.

2. Johnson & Johnson
OK, so I'm cheating a tiny bit here: Johnson & Johnson is a big pharmaceutical player, but it's also something of a conglomerate with medical devices, diagnostics, and personal healthcare products in its bag of tricks, too. However, Johnson & Johnson's pharmaceutical business is where a lot of its beefy margins and growth is current coming from.

Based on comments made by J&J's management in Q2 2014 Johnson & Johnson has introduced 14 new drugs since 2009 which have brought in a grand total of $12.5 billion in sales, far and away higher than any of its peers.


Data as of the end of Q2 2014. Source: Johnson & Johnson

J&J will be looking to lean on its broad product diversity as well as newly approved oncology and diabetes products for growth. Invokana, a new type 2 diabetes drug that operates within the kidneys to remove glucose from the body via urine, and Imbruvica, a revolutionary blood cancer therapy, are just two of many drugs that should sustain J&J's growth throughout the remainder of the decade and beyond.

Over the trailing 12-month period Johnson & Johnson has generated over $14 billion in free cash flow. This steady growth in free cash flow is what's primarily responsible for J&J's ongoing streak of dividend increases that currently stands at 52 years.

3. Merck
Lastly, we have Merck which to many extents is in a similar to boat to Pfizer. It's able to generate more in revenue than Gilead, but isn't as efficient at converting that revenue into free cash flow. Still, over the trailing 12-month period Merck has generated $10.8 billion in free cash flow, and that's certainly nothing to sneeze at.

Source: Merck & Co.

What could put some pep in Merck's step? How about the recent approval of anti-PD-1 inhibitor Keytruda, which is currently approved as a last line of defense in advanced melanoma patients with the BRAF V600 mutation. Unlike traditional cancer drugs Keytruda works with the body's immune system to essentially train it to locate and fight cancer cells. Overall, 24% of patients saw their tumors shrink during clinical studies. That may not sound like a lot, but considering that most patients progressed while taking two or more previous therapies before taking Keytruda it's an intriguing result. It's possible Keytruda may be approved for a moat of new indications in the coming years.

Like the aforementioned two big pharmas above, Merck is also supportive of its shareholders. In May 2013 Merck announced a $15 billion share repurchase program that's meant to boost shareholder value and complement its existing dividend.

Gilead is great in its own right; no one is going to argue against that. But when we're looking at companies who are capable of rewarding shareholders with dividends and buybacks, these three big pharma stocks may ultimately have one up on the fast-growing Gilead Sciences.

The article 3 Big Pharma Stocks With More Free Cash Flow Than Gilead Sciences Inc. originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of, and recommends Gilead Sciences and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.