Can Big Pharma Bring Big Gains to Your Portfolio?

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Drugs are big business! Big pharmaceutical companies spend billions of dollars and countless hours researching into solutions to everyday human health problems. To reward them for their efforts they are granted with a 20 year patent window, once that’s up though it’s free game for all.

The drug companies hate the patent expiry, especially if they have a drug that’s selling by the boatload every single day. To combat this they continue to petition their patents and try their best to extend them. Pfizer (NYSE: PFE) just got their popular Viagra patent extended all the way through 2020 meaning there will be no generic ED drug on the market through 2016.

As well as knowing when the drug companies will lose their beloved products, we can also find out what they’re working on by looking at their pipeline. This document, typically found on the company’s website, will outline the drugs that are in the process of being made, researched and manufactured by the pharmaceutical companies.

Checking Big Pharma’s Pipelines

Pfizer has a total of 78 projects in their pipeline as of November 2012. 25 of those projects are in their very first phase, 28 in the second, and 17 in the third phase. Pfizer has 8 in registration with a handful of drugs recently approved for market. Those approved include Xeljanz, a drug for the treatment of rheumatoid arthritis, something that may be more frequent with the aging population. Pfizer also launched two cancer targeted drugs with Xalkori going after lung cancer and Bosulif for the treatment of leukemia.

Pfizer isn’t the only multinational pharmaceutical company though, we also have Bristol-Meyers Squibb (NYSE: BMY) who hasa nice looking pipeline. BMY have a large selection of oncology, virology, and cardiovascular drugs in the works that could one-day head to market. The company has seven drugs that are currently in the registration phase and are likely to be on the market within the next year. BMY has 16 major drugs that are currently under patent and selling in at least one major market around the world.

AstraZeneca (NYSE: AZN) may be located overseas but they have lots of new drugs in their pipeline and plenty already in the market to be earning cash right now. Many of AstraZeneca’s drugs focus on cardiovascular disorders, such as diabetes, and respiratory issues, such as asthma and COPD, but the company also manufactures oncology and neuroscience drugs.

They’ve Got The Pipelines, Do They Have The Sales?        

These drug companies have been on a tear as of late, but can those runs continue or will these drug manufacturers slip back to the ground with one odd ruling? No one really knows. One sure fire way to ensure that you’re not left with a set of worthless shares is to do your due diligence. Let’s take a look at the fundamentals of three of the biggest pharmaceutical companies in the world.

Pfizer has returned around 25% over the past year to investors while revenues grew at -0.6% and EPS was up 21.3%. If you stretch out to the five-year mark on this company then you’re looking at an opposite picture, annualized revenue growth comes in at 7.31% and the EPS is showing a -1.34%. The P/E for a company that seems to be having some long term growth issues is quite high at 20.9 which signifies to me that stock market participants may believe the Pfizer pipeline to be quite good looking. The company has a return on investment of 8.4%, that’s below the industry average but Pfizer is definitely in a different position to many companies out there.

Bristol-Meyers Squibb is a $60 billion pharmaceutical company that carries a P/E a little lower than Pfizer at 18.4. Unfortunately for BMY, their earnings aren’t quite as good looking as even the lackluster Pfizer. BMY has a 9% one year revenue growth amount, that’s pretty good until you look at the -47.2% EPS growth over the year. Going out over a five year time-span for this company shows a -0.97% revenue growth and a -0.53% value for EPS growth over the period. The one great thing about BMY is their incredible 29.9% ROI average over the last five years, that value eclipses the industry average.

AstraZeneca is perhaps the best looking in terms of growth numbers. The one-year figure for revenue is 1% while the five-year is 1.17%. If you look at EPS growth over the year you’ll see a 24% rate of growth or an average of 10.15% over the last five years. The P/E ratio at AZN is a mere 10.2 and the five-year average ROI is standing at 27.3%, is the stock market missing something here?

Final Verdict

AstraZeneca is, without a doubt, the best looking prospect out of the three companies. I am by no means an expert on medicine but I do like the numbers. 5 years of incredible ROI is pretty good in my book and even if this company is about to lose a top patent drug they have lots in the pipeline to help fix it.

Pfizer would be second for me. If it weren’t for its high P/E I’d probably go out and buy some for myself. The company pays a great dividend and they’re definitely not going anywhere in the long term. I believe that Pfizer will continue to innovate in their drugs but a pullback is needed for my investment.

BMY is likely an “avoid” for me. The earnings look really shaky, even when spread out over a five year period. I’d definitely like to see more from this company before making an investment. 

Ash1402 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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