10 Large Caps to Rule Them All

After sifting through countless small caps and mid-cap stocks to rule them all over the past 20 weeks, the time has finally come to tackle large-cap companies. Large caps will usually not offer the same torrid growth pace that can be found with small caps, but their businesses are often well established globally, with a rich history of profitability. This global presence gives large caps a distinctiveness that small and mid-caps usually don't have -- namely, many pay a dividend and can essentially run on autopilot in your portfolio.

As we examine the 10 large caps to rule them all over the next 10 weeks, keep in mind you will see a diverse range of sector and companies represented.

For the inaugural large-cap pick, I think we should revisit pharma's most impervious pipeline, Teva Pharmaceuticals (Nasdaq: TEVA  ) .

What it does
Teva Pharmaceutical is the godfather of generic drugs. When compared next to some of its closest rivals, including Ranbaxy International, Novartis' (NYSE: NVS  ) generic-drug division Sandoz International, and Watson Pharmaceuticals (NYSE: WPI  ) , Teva generates more revenue than the sum of them combined! With 1,300 drugs currently in its pipeline and countless more pending approval, Teva has rightly assumed the generic-drug throne.

How it stacks up
When faced with the question of choosing between cutting-edge pharmaceutical companies and a vulture-like company in Teva that gobbles up the scraps, I think the vulture is going to win nine out of 10 times.

This isn't to say that Teva doesn't face FDA hurdles, because it does currently have its own unique drugs under patent -- Copaxone for the treatment of multiple sclerosis and Azilect for Parkinson's disease. Copaxone is responsible for greater than $3 billion in revenue each year and holds a 31% share of the multiple sclerosis market.

The question then becomes, why would anyone invest in a pipeline with limited patents if a generic vulture like Teva is waiting in the wings? I honestly can't answer that for the current shareholders of the following pharmas, but I can definitely provide this comparison as further evidence of the generic company's dominance:

  • Eli Lilly (NYSE: LLY  ) : Lilly is set to lose Zyprexa, Evista, Cymbalta, and Humalog to patent expiration all before the end of 2014. These drugs accounted for $6.2 billion of Lilly's $12.1 billion in revenue through the first six months of 2011.
  • GlaxoSmithKline (NYSE: GSK  ) : Glaxo is slated to lose both Seretide (Advair) and Avandia to patent expiration before the end of 2012. These two drugs accounted for 24% of Glaxo's revenue over the past six months.
  • AstraZeneca (NYSE: AZN  ) : AstraZeneca is facing the prospect of losing Seroquel, Symbicort, Iressa, and blockbuster Nexium all by 2014. These drugs accounted for just shy of $7 billion of the company's $16.7 billion in revenue through the first half of 2011.
  • Pfizer (NYSE: PFE  ) : Pending patent expirations through 2014 include Viagra, Celebrex, Xalatan, Geodon, Detrol, and the best-selling drug in the world, Lipitor. Combined, these drugs contributed $8.8 billion of the company's $28.9 billion in biopharmaceutical products throughout the first half of 2011.

These companies might as well be serving their blockbuster drugs up on a silver platter for Teva's taking.

How it could make you money
I think this goes without saying, but the market for generic drugs is only growing. Health-maintenance organizations are doing everything they can to rein in costs before universal health care becomes the accepted norm in 2014, paving the way for generics to become an even more cost-effective tool.

Also consider the limitless possibilities of drugs that Teva could get the generic rights to. Eventually everything comes off of patent, and if Teva's plethora of European patent applications is any indication, the company's future business is not in any jeopardy.

Perhaps the least talked about, but most impressive, aspect of Teva has been its dividend growth. Teva's current yield of 1.9% may be a yawner, but take into consideration that its dividend has grown by 24.9% annually over the past five years and suddenly that yawn turns into a jaw-dropping drool. With a payout ratio of only 19%, there is plenty of headroom for future dividend increases.

Would you put money to work in Teva Pharmaceutical here? Share your thoughts in the comments section below and consider adding Teva Pharmaceutical to your watchlist to keep up on the latest in the pharmaceutical sector.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Teva Pharmaceuticals and GlaxoSmithKline and has written covered calls on GlaxoSmithKline. Motley Fool newsletter services have recommended buying shares of Pfizer, Teva Pharmaceutical, GlaxoSmithKline, and Novartis. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that doesn't cost an arm and a leg.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 13, 2011, at 5:58 PM, TheDumbMoney wrote:

    Hmmm. Yes, but Copaxone is over 20% of Teva's revenue I think, and that's AFTER the recent ratiopharm acquisition. And Copaxone goes off patent in May 2014, too.

    That's pretty close to the Glaxo loss anyway.

    Food for thought, though TEVA is indeed going to pick up a lot of (lower margin) generic business. In my humble view though, I agree teva is a likely a great buy at under $40/share, which is where it is today.

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