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I received a good question off-line recently asking why I prefer PFE over JNJ. I gave a general, opinionated answer but later thought it would be better to back up my opinions with a little research. Before you read further please understand that I hold both JNJ and PFE in my portfolio and that combined they make up under 3% of my investments. My conclusion is that both companies have performed very well, but that PFE is better concentrated in pharmaceuticals and their development.
1. Market capitalization valuations
At a market cap of $215 billion PFE is made of two major segments, a pharma company with $27 billion in sales and consumer products with $5 billion in sales. Together the two segments generated $7.8 billion in profits almost all from pharmaceuticals. That is for $100 of PFE stock you get $12.55 in pharma sales, $2.32 in consumer sales and $3.6 in profits almost all from drugs.
For JNJ's market cap of $175 billion you get three businesses. A pharma business with 2001 sales of $15 billion, medical devices with sales of $11 billion, and consumer products selling $7 billion. Of the three businesses, pharma is the best with an operating profit of 33%, followed by devices with 18% margins and consumer products at 14% (remember that operating profit overstates profitability; these numbers would imply JNJ made $7.9 billion last year but net earnings were about $5.7 billion). For $100 in JNJ stock you buy $8.57 in pharma sales, $6.28 in device sales and $4.00 in consumer product sales all of which results in $3.25 in profit (of which $2.02 comes from drugs, $0.82 from devices and $0.41 from consumer products).
My conclusion? In J&J you have less exposure to the pharma business. That may be good if pharma pricing gets very difficult going forward but certainly to date the best business either of these companies has been in is pharmaceuticals.
2. Patent expiration.
The following information is in the last PFE annual report on patent expirations
Basic U.S. Patent
Drug (2001 sales billions) Expiration Year
Accupril ($0.6) 2002
Diflucan ($1.0) 2004
Zithromax ($1.5) 2005
Norvasc ($3.5) 2006
Zoloft ($2.4) 2006
Zyrtec ($1) 2007
Lipitor ($6.4) 2010
Viagra ($1.5) 2011
Viracept ($0.4) 2013
Celebrex (alliance) 2013
Most of the biggest sellers have several years left of protection. It is harder to get information this clear in the J&J report, however their major pharma products are identified in the last quarterly report as Procrit/Eprex, Risperdal, Duragesic, Remicade, Topamax and Aciphex. Of those, Risperdal has a patent expiry in 2007, Duragesic in 2004, Topamax has orphan drug exclusivity to 2008. The launch of Aranesp is probably of more importance than patent expiry to Procrit. Remicade as a monoclonal antibody will likely be relatively resistant to generic competition and Aciphex is an alliance product. I conclude that PFE has excellent patent protection where it needs it most but that JNJ also does not face immediate patent woes.
3. R&D Spending
PFE is able to spend a great deal on R&D. In 2001 they spent $4.8 billion and this year intend to spend $5.3 billion; no one spends more on new drug development. JNJ spent $3.6 billion in 2001 of which $2.5 billion was on drug development. Effectively, JNJ is able to spend half as much on drug R&D as PFE. Considering the market caps, for your $100 in PFE you paid for $2.23 in drug R&D last year. For the same $100 in JNJ you bought $2.06 in total R&D of which $1.43 went into pharmaceutical development. For your money you buy more R&D in PFE and significantly more drug R&D than you do in J&J. That is why the Pfizer pipeline is better than J&J's although I think it is difficult to quantify how much better.
JNJ's last quarterly report gave sales growth of 19.8% for pharmaceuticals, 8.2% for devices and -.7% for consumer products. Consolidated sales growth was 11.3% and earnings growth was 18.2%. Overall, outstanding results. PFE had sales growth of 11% which reflected 12% growth in pharmaceuticals and 4% growth in consumer products. PFE's net income was up 18%. PFE's guidance is for 15% growth going forward. I could not find written guidance from J&J's management on future earnings. Both companies have done an excellent job of growing earnings and sales.
I would not want to be in a position where I had to argue that JNJ is a bad investment. It is not and I am happy owning it. But PFE has more focus on pharmaceuticals and is in a somewhat better position to reap future benefits from R&D. It also has more of its eggs in the pharmaceutical basket than JNJ and that may be more risky. I would be happier buying both companies if they were cheaper, but at the moment each dollar I spend on PFE stock buys more R&D spending, more pharma sales and more profits than a dollar spent on JNJ. On the other hand, the dollar spent on JNJ buys more total sales and more diversity across these three industries.
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