Pharmaceutical companies remain under pressure as they deal with increased competition from each other, which threatens their market share. Many of them are losing the exclusive patents they have for their products as more drugs are becoming generics. This is forcing the companies to increase spending for research and development to come up with new products. The problem is that decreasing revenues leave them with fewer dollars to invest in such measures. We look at five of the top pharmaceuticals and examine some of the problems they face as they try to maintain their foothold in the industry.
AstraZeneca PLC (AZN): At the time of this writing, the company was trading around $47. Its 52-week trading range was $40.59 to $52.24. At the current market price, the company is capitalized at roughly $63 billion. The company's revenues were $33.6 billion, while net income was $10.1 billion.
Competition in the generic market caused AztraZeneca to lose about $450 million. In early February, the company announced that it would cut 7,300 jobs from its workforce to help reign in spending. The company's revenues are under pressure, as several of the key drugs in its pipeline will be made available in generic form over the next few years. These include Crestor and Nexium.
Earnings per share for the last year were $1.25. It paid a dividend of $1.70, yielding 3.5%. This yield was less than some of its competitors, such as Pfizer Inc. and Merck & Co., Inc., which had yields of 4.1% and 4.4%, respectively. AstraZeneca did have better operating and gross margins than its competitors. Its operating margin was 41.06%, which is higher than many of its competitors. Its gross margin is 82.14%, which is also higher. However, those margins have declined in recent years, indicating the company has less money to spend on research and development.
The gross margin for the industry was 50.64%, and the operating margin was 11.84%. While the company's yield is attractive, its margins are problematic. This stock is a hold.
Bristol-Myers Squibb, Co. (BMY) Shares are trading around $32 at the time of writing. Its 52-week range is $24.97 to $35.44. Bristol-Myers earned $21.2 billion in revenues last year. It paid a dividend of $1.36, yielding 4.2%.
Its earnings per share were $2.16 last year. The company announced that its GAAP earnings per share rose 79% to $.50 in the fourth quarter and its non-GAAP EPS rose 13% to $.53. Its net income was $3.71 billion and its marketing capitalization is $54.7 billion.
2011 was a stellar year for Bristol-Myers. The company received several product approvals, which contributed to its solid operating performance. Also, it is making strides to continue its product lines. In January, it agreed to pay $26 a share to buy Inhibitex, which makes a drug to treat hepatitis C. This was an all-cash deal valued at $2.5 billion. Bristol-Myers' operating margin was 32.75%, and its gross margin was 74%. Company officials believe these accomplishments, along with a dividend increase and an ongoing share repurchase program, show it is committed to driving shareholder value in 2011. BMY is a buy.
Eli Lilly and Company (LLY): With shares trading around $40 at the time of writing, Eli Lilly was closing in on its 52-week high of $42.03. Its low was $33.46. Eli Lilly has a market capitalization of roughly $44 billion. Its earnings per share is $4.18. Recently, the company suffered the loss of one of its patented drugs, which the company says caused its fourth quarter 2011 revenues to decline by 2%. The patents for Zyprexa and Gemzar have expired. The company's finances were particularly affected by declines of Zyprexa, which is an antipsychotic drug. The drug's revenue dropped 44% in the fourth quarter to roughly $750 million. To help maintain financial stability, the company will freeze the salary of most of its employees.
The company reported that its 2011, fourth quarter gross margin decreased 4.6% to about $4.7 billion. The gross margin was 78.1%. The lower sales of Zyprexa was the main culprit, while Gemzar's sales impacted the margin to a lesser extent. The operating margin was 27.06%. Eli Lilly acknowledged that the margin decreased 19% during the 2011 fourth quarter because of the company's lower gross margin and increased marketing, selling and administrative expenses. That was offset by increases in spending on research and development.
Eli Lilly's continued commitment to R&D and its strong yields make it a buy.
Merck & Company, Inc. (MRK): Shares are trading around $38 at the time of writing. This is approaching the company's 52-week high of $39.43. Its low was $29.47. The company recently reported that, although its revenues missed expectations for the 2011 fourth quarter, its earnings per share for that period came in slightly higher than the estimates. Merck is the second largest pharmaceutical company in the U.S. Its revenues may be further improved if it decides to acquire companies to boost its hepatitis C drug pipeline. Fourth quarter 2011 revenues were roughly $12.9 billion, while the estimate was about $12.5 billion. Earnings per share for the quarter were $.97, which was higher than the $.95 per share that was predicted. Its earnings per share were $1.37. Merck pays a dividend of $1.68, yielding 4.4%, which is in line with some of its competitors. For example, Eli Lilly and Co. and Pfizer Inc. paid yield of $1.96 and $.88, respectively. That yielded 4.9% for Eli Lilly and 4.10% for Pfizer. Merck increased the quarterly dividend 11% to $0.42 per share.
The company reported full-year and fourth-quarter double-digit worldwide growth for four of its top selling drugs - Januvia, Janumet, Isentress and Gardasil. The company credits sales from these drugs as the main reason revenues increased. It plans to file for approval for five products it deems "major" between 2012 and 2013. Revenues for 2011 were $48 billion, which was a 4% increase over 2010.
The company has made investing for the long term a priority, which should bode well for its future earnings. It has a $117.1 billion market cap and a net income of $4.2 billion. Gross margins expanded and operating margins dropped. Its gross margin was 69.42%, and its operating margin was 25.87%. While the gross margin was better than the prior year's, the operating margin was worst. Its price to earnings ratio is 28.10, which is twice as strong as the industry's average of 14. Merck's commitment to increasing its pipeline make it a buy.
Pfizer Inc. (PFE): Shares are trading around $21 at the time of writing, when the company announced a major recall of one of its birth control pill products. The recall stemmed from a possible under dosage or over dosage in the pill called Lo/Ovral 28. Pfizer announced in late January that it was voluntarily recalling the oral contraceptive, and that the cause of the problem had been identified and corrected. It remains to be seen how the recall could affect the company's earnings. It may face lawsuits from users of the pill becoming pregnant because of they received an incorrect dosage.
Pfizer pays a dividend of $.88, yielding 4.1%. Its 52-week trading range is $16.63 to $22.17. Its operating margin is 27.49% and its gross margin is 77.7%. Its price to earnings ratio is 14.66. Pfizer has a market capitalization of $162.3 billion, and its sales are the largest in the world. Earnings per share were $1.44. The company says it is committed to repurchasing approximately $5 billion of its common stock in 2012 under its recently authorized $10 billion share repurchase program. It plans to pay more than $6 billion in dividends.
In terms of sales, Pfizer is the largest pharmaceutical company. It had been the exclusive maker of one of its top selling drugs - Lipitor. The extent of the impact on the company's overall sales remains to be seen. This coupled with the mishap with the oral contraceptive and possible lawsuits present financial challenges. This stock is a hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.