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Looking For A Long-Term Pharma Play?

There are a number of big pharma companies out there. So how do choose? This article will take a look at the fundamentals of the top pharmaceutical firms to assess which business is the best addition to your portfolio. I will examine eleven companies to see which offer the best value for a long-term pharma position.

Efficiencies And Productivity

From the table below, Roche Holding (OTCQX:RHHBY), AstraZeneca (NYSE:AZN), and Bristol-Myers (NYSE:BMY) all have net profit margins of above 20% while the industry and sector have 5-year average net profit margins of 14.81% and 13.43%, respectively. These three companies, as well as GlaxoSmithKline (NYSE:GSK), far exceed industry and sector averages of efficiency and productivity.

Further, with regards to ROA, ROE, and ROI, AstraZeneca, GlaxoSmithKline, Roche Holdings, and Bristol-Myers again lead the pack while the industry's 5-year averages are 9.98%, 15.19, and 12.63, respectively. Looking at the table below, these four leaders clearly provide the above-average operational efficiencies that a value investor looks for.

Finally, with regards to production, the long-term value investor need not pay attention to the successfulness of a company's particular product. Big-pharma knows the importance of R&D and is spending hand-over-fist on the next drug. While current efficiencies tell a lot about the management, strategy, and long-term direction of the business, this is not necessarily the case with the production of particular products which come and go.

(click to enlarge)

Valuation

Again looking to the above table, of the four outstanding companies, AstraZeneca and GlaxoSmithKline hold among the lowest trailing P/E ratios of the group at 9.84 and 13.62, respectively with an industry average of 24.11 and a sector average of 24.46.

Of course, P/E ratios tell only a partial valuation story. For example, while GlaxoSmithKline may have low P/E ratio, the reason for this may be that its total debt-to-equity ratio of 185.2x far exceeds the industry and sector averages of 25.2x and 44.88x, respectively. This is not to say that the long-term value pharma buyers should be concerned with GSK's going concern. Rather, attention should be focused on how GlaxoSmithKline may disadvantage itself with high debt when opportunity presents itself in the future.

Dividends

In addition to the operational ratios and favorable valuations, it is a surprise that two stocks stand out from the group as top dividend issuers. With dividend yields of 5.35% and 5.91%, respectively, GlaxoSmithKline and AstraZeneca lead the pack again when compared to the nine other pharma companies listed above.

Results

At this point, it should be clear that GlaxoSmithKline and AstraZeneca are excellent choices for the big-pharma play in one's portfolio. These companies offer above-industry operational efficiencies, at- or below-value stock prices for what they bring to the table, and above-industry dividend yields. Of the two, AstraZeneca stands as number one due to GlaxoSmithKline's high debt levels, but either company would make a stellar addition.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.