Are Pharmaceutical Companies Investable?

Can investors continue considering pharmaceuticals suitable for investment? Consider the Pharmaceutical ETF (PPH). A one year hold takes you from $75 to $78, approximately. Thanks a lot! Longer term holds are more lamentable.

Most pharmaceutical companies continue to lay eggs one way or the other. Perhaps with the exception of Bristol Myers Squibb (BMY) and Schering-Plough Corp. (SGP), most companies cannot keep producing new drugs into the market and then come up with adequate defences against patent expirations, lawsuits, intellectual infringements, FDA dis-approvals and the ever popular re-structuring where the company offers to consume vital body parts in desperate bids to shore up short term valuations.

The investor is more than skeptical. The question has become, why bother holding this asset class? Today’s good news turns around and bites you tomorrow. Investors cannot wait for industry fundamentals to swing around such as with home builders or other cyclicals. Pharmaceutical fundamentals are death and disease, perhaps two of the most constant and compelling problems known to mankind. These drivers should adequately produce positive financial results, but have proven fickle.

Larger pharmaceutical companies are amalgams of success and failure seasoned with product life cycle problems. The failures overwhelm the successes. Is it time to reconsider how we hold wealth in this volatile business?

I am looking for a corporate structure where one drug or therapy is placed into one say, partnership structure, with tradeable units. Each partnership will have an identifiable business. Investors may reach their own conclusions buying selling or holding. Third party companies may be involved in the overall corporate management structures. Similar to REITS.

I doubt if the current tax advantage for partnership units will hold politically. So anyone’s analysis should include a full tax load. But with all the necessary R&D, some of the marginal rates may prove attractive.

By spinning off the units, you allow value to be unlocked. The value would be naked and identifiable. The business unit becomes more accountable to the marketplace and investors are able to make case by case decisions. This replaces the current method of buying a blind pig in the poke, which is what most pharmaceuticals companies are becoming.

Comments

[Grant Lawson:]

Part of me wishes all companies would offer this sort of model. That way it would be easy to avoid decent businesses who throw their cash flow into new ventures. It's just too bad the real world doesn't work this way. Public companies are messy.

The other part of me likes some intangiblity in my investments though. For example, by buying JNJ I think I get management competence in capital allocation, along with several businesses/products which make up the greater whole.

2007 Jul 31 09:20 PM