The Debt Dogs of Pharmaceuticals

Charlie Munger, Warren Buffett's business partner, has condemned drugs, liquor, and leverage as humanity's three biggest downfalls. The first two are your own responsibility, but if you're invested -- or are thinking about investing -- in the pharmaceuticals industry, you should know which companies in the space are the deepest in debt.

Leverage is not inherently bad for a company. A rapidly -growing company can intelligently employ debt to exploit its market opportunity. At low interest rates, debt can fund shrewd strategic acquisitions. Since it's generally cheaper than equity, debt can also lower a company's cost of capital.

But too often, companies end up abusing debt -- and as Munger reminds us, excessive leverage can lead to ruin. Let's examine a few of the most heavily indebted pharmaceuticals.

Company

Total Debt/Capital

Interest Coverage

ISTA Pharmaceuticals (Nasdaq: ISTA  ) 9,478.3% 1.3
Jazz Pharmaceuticals (Nasdaq: JAZZ  ) 101.6% 2.5
Warner Chilcott (Nasdaq: WCRX  ) 101.4% 2.1
Elan (NYSE: ELN  ) 86.9% 0.6
GlaxoSmithKline (NYSE: GSK  ) 60.8% 11.1

First of all, look at ISTA's debt-to-capital ratio. At 9,478%, the company has nearly 100 times as much debt as it does capital. It should be no surprise, then, that the company isn't having an easy time making its interest payments; however, the company's current debt load doesn't seem as onerous when you compare it with the cash in its bank account. The company's $73 million in debt is almost entirely offset by $67 million in cash.

The one stock that doesn't quite match the profile of the others on this list is GlaxoSmithKline. This company has the largest nominal debt load of any on the list, at more than $24 billion, but Glaxo is a $96 billion company with more than $10 billion of cash on its books. With an interest coverage ratio of more than 11, it clearly isn't having any issues managing its debt. It's worth noting that Glaxo also has the cheapest enterprise value-to-EBITDA multiple on this list, at 6.1.

For an easy way to stay current on any of these stocks, add them to My Watchlist:

Alex Pape owns shares of any company mentioned. Elan is a Motley Fool Rule Breakers choice. The Motley Fool owns shares of GlaxoSmithKline, which is a Motley Fool Global Gains selection. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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