With the drug sector earnings season winding down and all the major pharmaceutical companies having already strutted their stuff for 2007, now seems like a good time to take a look at how they fared and, more importantly, where they're headed.
|
Market Cap (Billions) |
Sales Growth |
EPS Growth |
*Adjusted EPS Growth |
|
|---|---|---|---|---|
|
Eli Lilly |
$57 |
19% |
11% |
17% |
|
Wyeth |
$57 |
10% |
10% |
12% |
|
Novartis |
$114 |
8% |
68% |
(3%) |
|
GlaxoSmithKline |
$121 |
6% |
7% |
7% |
|
Merck |
$98 |
7% |
(26%) |
27% |
|
Pfizer |
$153 |
1% |
(55%) |
7% |
All things considered, it wasn't too bad of a year for the large-cap pharmaceutical companies, except for Pfizer, which my Foolish colleague picked to have more trouble again this year.
The two numbers that stand out like teenagers at a Wiggles concert are the negative earnings-per-share growth of Merck and Pfizer.
Merck's lack of growth comes from the charge associated with paying its monster $4.85 billion settlement for Vioxx. While it's an awful lot of money to give up, these things happen, and investors should be willing to excuse them -- assuming they really are one-time events.
Pfizer has the exact opposite problem -- mostly. Its 2007 income was lower because its prior-year income included the sale of its consumer health business -- Rogaine, Sudafed and the like -- to Johnson & Johnson
Headed in the opposite direction was Novartis, which saw EPS jump 68% because of the sale of its Medical Nutrition and Gerber divisions. Like Pfizer, Novartis is trying to refocus on producing prescription drugs. It will take a year-over-year revenue hit but should emerge a more focused company.
When the numbers don't match
All things being equal, growth of the top lines (sales growth) and bottom lines (adjusted EPS growth) should be the same, but they hardly ever are. The most telling thing about where a company is headed can often be found in the reason why the growth rates differ.
Sometimes the explanation is relatively simple. Eli Lilly's sales growth outpaced its adjusted EPS growth because it purchased partner ICOS, moving sales of erectile dysfunction drug Cialis from joint venture income to actual sales. Merck has the opposite issue, because the increased sales of its cholesterol drugs don't get booked as sales since they're through its partnership with Schering-Plough, but they do trickle down to the bottom line.
Pfizer and Glaxo, on the other hand, have been doing a bit of income sheet magic, turning relatively small revenue growth rates into larger EPS growth. The disappearing trick involves the companies buying back shares, thus decreasing the size of the EPS denominator and increasing the EPS. It's a neat trick that's been performed thousands of times. As long as investors understand what's happening (and would have bought more shares if the money had been returned to them in the form of a dividend), there's certainly no harm in share buybacks.
In the meantime
What the pharmaceutical companies lack in growth potential because of expiring patents, they make up for by generating a lot of cash. There's so much cash that, in addition to stock buybacks, they're also returning a lot to investors in the form of dividends.
Recent Income Investor pick Pfizer, for instance, is now sporting a whopping 5.7% annualized dividend yield, and fellow pick Glaxo is keeping the pace, also at 5.7%, thanks to a recently increased dividend (yeah) and a decreased stock price (boo).
Another good sign of the long-term viability of large pharmaceutical companies is that, while they've announced cost cuts left and right, there hasn't been much slowdown in R&D spending. Since spending on pipeline development drives revenues in the future, it's nice to see that management isn't sacrificing long-term growth for short-term gains in bottom-line growth.
The pharmaceutical companies have been pretty good defensive plays in previous recessions, so they're certainly worth a further look. You can make your first stop a look at the companies' guidance for this year.
Dive into a little more Foolishness on big pharma:
