"A billion here, a billion there, and pretty soon you're talking about real money."
It's debatable who first uttered that phrase. What isn't debatable, though, is that David Tepper and Appaloosa Management are accustomed to throwing around plenty of real money. The multibillion-dollar hedge fund run by Tepper spent over $1.1 billion in the fourth quarter of 2016 on just four drug stocks: Allergan (NYSE:AGN), Mylan (NASDAQ:MYL), Pfizer (NYSE:PFE), and Teva (NYSE:TEVA).
Why so much money on these stocks? And should ordinary investors follow the billionaire's lead? Let's look at what makes these particular pharmaceutical stocks so attractive.
Allergan: An acquisition machine
Tepper's Appaloosa Management already had a sizable stake in Allergan. In the fourth quarter, the hedge fund bought another $660 million of the drugmaker's stock. Allergan now ranks as the top holding for Appaloosa.
Why Allergan? The company is an acquisition machine that continues to drive growth. You would run out of fingers pretty quickly trying to count all of the acquisitions that Allergan has made since 2007. These deals have transformed the pharmaceutical company.
Appaloosa specializes in companies with distressed debt. Although Allergan has plenty of debt ($32.8 billion as of the end of 2016), the drugmaker doesn't appear to be in any distress. Revenue jumped 15% last year compared to 2015. Year-over-year adjusted earnings-per-share growth, however, was weak at just 2.3%.
However, Allergan has plenty of new product launches coming that should drive earnings growth higher. The stock looks attractively valued considering its growth prospects. I suspect that valuation was a major reason that Tepper scooped up even more Allergan stock.
Mylan: Bouncing back
Appaloosa initiated a stake in Mylan with a purchase of $125 million of the drug stock in the fourth quarter. Mylan's share price is still recovering from a big plunge that began in August when the company came under fire for its drug pricing.
There's a good case to be made that Mylan is now a bargain buy. The stock trades at less than eight times forward earnings. Much of the negative focus on Mylan has been about its EpiPen product. However, EpiPen is just one of over 2,700 products that Mylan markets across the world. EpiPen sales are expected to make up only 6% of the company's total revenue in 2017.
Like Allergan, the company has added to its portfolio through strategic acquisitions and seems likely to make more down the road. Mylan has also forged key partnerships that should help improve its fortunes. A good example of this is its agreement with Momenta (NASDAQ:MNTA) to develop and market six biosimilars.
Pfizer: Nice dividend and promising pipeline
Pfizer apparently was even more attractive to David Tepper than Mylan. His fund spent $156 million in the fourth quarter on Pfizer stock.
One obvious reason to like Pfizer is its dividend. The drugmaker's dividend yield currently stands at 3.93%. Despite paying out more to fund dividend payments than it earns, Pfizer shouldn't have a problem keeping the dividends flowing. That's true partly because of the company's strong cash flow, but Pfizer's earnings growth prospects is another key reason that its dividend should remain solid.
Pfizer claims several current products that should fuel that growth. Cancer drug Ibrance stands at the top of the list. Another cancer drug, Xtandi, which Pfizer picked up with its acquisition of Medivation, has considerable potential.
In addition, Pfizer's pipeline is quite promising. The company expects 15 read-outs from pivotal clinical studies over the next couple of years. One pipeline candidate of special note is PD-L1 inhibitor avelumab. The U.S. Food and Drug Administration (FDA) is scheduled to announce its decision on approval for avelumab in treating metastatic Merkel cell carcinoma (MCC) by late May.
Teva: A comeback candidate
Appaloosa bought $183 million in Teva stock during the fourth quarter. The Israel-based drugmaker's stock has been hit particularly hard over the past six months, making share prices fall to their lowest levels in five years.
Tepper probably viewed Teva as a good comeback candidate. The company's acquisition of Actavis Generics from Allergan last year is already helping boost revenue and earnings. However, there has been a new development for Teva in early 2017 that could make a comeback much more challenging.
A U.S. District Court recently invalidated several key patents that Teva holds for Copaxone. The multiple sclerosis drug generated sales of $4.2 billion last year -- over 19% of Teva's total revenue. Teva is appealing the court's decision.
The company is also looking for a new CEO. Former CEO Erez Vigodman recently left. Teva appointed its board chairman Yitzhak Peterburg as the interim CEO while a search is conducted for a successor to Vigodman.
Three out of four isn't bad
I think the billionaire spent his investors' money pretty well overall. I like Allergan, Mylan, and Pfizer. Teva, however, faces too many hurdles to overcome to be a great pick, in my opinion.
Three out of four isn't bad at all, though, especially when you're talking about investing over $1 billion. That's real money.