maandag 10 september 2012

A Quick Look at the Top 5 Pharmaceutical Companies

While Marc Faber is predicting that the stock market will be lower in a few months, he suggests that investors diversify into the pharmaceutical sector. The reasoning behind this is that during a stock market crash, the pharmaceutical sector will be less hurt by worsening market conditions. Pharmaceutical companies provide a stable dividend and their products are less dependent on economic cycles.

There are many pharmaceutical companies for investors to put their money in, but I suggest to choose for the big companies as you will be sure to get a stable dividend with the lowest risk profile. Smaller biotech companies are too speculative to invest in. I'll discuss the top 5 pharmaceutical companies (by revenue) in this article. These are Johnson and Johnson (JNJ), Pfizer (PFE), Roche (RHHBY.PK), GlaxoSmithKline (GSK) and Novartis (NVS).

When choosing companies in the large pharmaceutical sector, the P/E ratio is the most important. There is a difference between brand-name companies and generic drug companies. The generic drug companies (like TEVA or a division of Novartis) basically sell the same drug as brand-name companies, but at lower prices.  Additionally, they don't have the problem of patent expiration. On chart 1 we can see that the P/E ratio for the pharmaceutical sector has been falling, bringing in nice valuations currently at a P/E of 16.6 for big pharma and a P/E of 18 for generic drug pharma.

Chart 1: P/E Ratio Pharma
A summary of the P/E ratios for the 5 top pharmaceutical companies is given in table 1. Based on this table, GlaxoSmithKline would be the most inexpensive company.
Table 1: P/E Ratio of Big Pharma
However, there are other things to consider when choosing to invest in a pharmaceutical company. It is important to look at the dividend and the product pipeline of the company, especially their "patent cliffs".

Read about it here.

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