Pharma Focus Is Good For Your Portfolio

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Last year will go down as the year pharmaceutical companies realized that drugs are where it's at.

Bristol-Myers Squibb (NYS: BMY) started the trend with its "string of pearls" strategy. It sold off its non-drug assets and spun out the baby formula business into Mead Johnson Nutrition (NYS: MJN) . Investors that traded their shares for a piece of Mead Johnson have done well -- it's up 58% since then -- but Bristol isn't doing too shabby either, up 49%. Both handily beat the S&P's 20% gain.

With that kind of performance, it shouldn't come as much of a surprise that Pfizer (NYS: PFE) decided to part ways with some of its non-drug businesses. It plans to sell or spin off its animal health and nutrition businesses, although it hasn't decided the exact mechanism yet. The pharma giant is keeping its consumer health-care and established products division. While they're technically still drugs, I wouldn't mind seeing those go, too. Over-the-counter and generic drugs have little to do with branded drugs.

Abbott Labs (NYS: ABT) is doing a clean split, separating its drugs from the rest of its products. The move seems to be driven by its megablockbuster Humira taking over the revenue line and swamping out its medical devices, diagnostics, and the like. The other products should get a fair shake over the valuation table, but it'll leave the new drug company in the precarious position of relying on the anti-inflammatory for nearly half of its revenue.

Of course, I'd be remiss if I didn't mention Eli Lilly, which doesn't need to sell off anything because it never diversified away from its core in the first place.

Cafeteria investing
These moves are great because they allow investors to pick and choose which segments they're most interested in. Right now if you want to own Pfizer's drug pipeline, but don't want the animal-health division, you don't really have a choice. In the near future, however, investors won't have that problem.

And if you want to diversify into multiple areas, you can create your own conglomerate by picking the best drug company, the best nutrition company, and the best medical device company for your portfolio.

Let's just hope Pfizer chooses to spin out its segments to give investors more options.

The flip side
But what about Johnson & Johnson (NYS: JNJ) , you ask? The company has certainly done pretty well for itself over the last century. A lot of its success can be attributed to expansion of margins, which is a heck of a lot easier as a company becomes larger. The conglomerate has struggled a little bit recently, but if you look at the historical growth, earnings have outpaced revenue by a wide margin.

The size also offers diversification. Johnson & Johnson's consumer health division is having a horrible time of late, but it hasn't affected the bottom line much because the company has so many other products to fall back on.

The company is more stable and therefore less risky, but that diversification comes at a cost: Growth areas like high-margin drugs get hindered by the slower-moving segments.

If you want a set-it-and-forget-it stock pick in the health-care industry, Johnson & Johnson is your best bet. But I think investors could do better picking and choosing the best options from a larger assortment of companies.

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At the time this article was published

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