Drug company investors get to enjoy such high gross margins that we often don't even think about them. Pfizer's
While it's nice to enjoy the high margins -- especially since they make up for all the cash that needs to be plowed into research and development -- there's little that drug companies can do to improve gross margins. Sure, economies of scale come into play as a drug reaches blockbuster status -- Merck's
A mighty shift
Unless you've been selling other medical products as well. Check out this jump in gross margins that Baxter
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
|
---|---|---|---|---|---|---|---|
Gross Margins |
43.7% |
45.1% |
45.6% |
46.5% |
47.8% |
48.5% |
49.0% |
Some of the increase is due to the company becoming more efficient. But most of it comes from a shift away from selling low-margin medical products and instead focusing on high-margin drugs.
Its 9% sales growth last year was boosted by its biosciences division, which experienced a whopping 18% growth in sales year over year. That's quite impressive, especially when you consider the revenues the company lost when it returned marketing rights for the drug Benefix to Wyeth
Baxter isn't done with the gross margin improvements either. It expects a further increase in gross margins of 1%-1.5% this year.
I'm sure you can see where I'm going here, Fools. Those margin improvements are essentially free money. Baxter can use the cash to increase its dividend, buy back stock, or reinvest in R&D.
Personally, I'd rather see it plug it back into development of more drugs like its flu vaccine. That would allow the company to increase its gross margins even further in the coming years.
A couple more examples
Baxter isn't the only fringe drugmaker that's using the gross margin trick to allow the bottom line to grow faster than revenues.
Alpharma
While Alpharma's gross margins will almost certainly increase as a result of the new drugs, its bottom line will be hurting for a little while. The launches are expensive, so SG&A expenses will skyrocket this year. Still, I think it's a good move for the mini-conglomerate.
Teva Pharmaceuticals
More profit for investors
In this difficult and uncertain time for the market, finding companies that can make more for less seems like a recipe for success. Just be careful to invest in companies that put their newfound money to good use.