Cash is king. That's true in just about every industry, but it's especially true among drugmakers, where acquisitions and licensing agreements to boost pipelines are commonplace. Plus, investors love their dividends, and it's a little hard for companies to write out checks without cash.

A company's free cash flow also tends to be a better measurement of its health than earnings, since the latter metric is easier to manipulate. Cash is either there, or it's not.

With that in mind, here are five drugmakers producing gobs of cash for their size:


Free Cash Flow (in Millions)

Dividends Paid (in Millions)

Cash and Short-Term Investments (in Millions)

Price/Free Cash Flow

Pfizer (NYSE: PFE)





GlaxoSmithKline (NYSE: GSK)





AstraZeneca (NYSE: AZN)





Amgen (Nasdaq: AMGN)





Gilead Sciences (Nasdaq: GILD)





Source: Capital IQ, a division of Standard & Poor's.

They're cheap, but ...
Pfizer, Glaxo, and AstraZeneca are all sporting single-digit price-to-free-cash-flow valuations, but there's a reason for that: Investors have already factored in their upcoming loss of major cash-producing drugs to generic competition. Free cash flow is sure to suffer as a result.

Still, every one of these three companies is easily covering its dividends, and all of them are delivering dividend yields to their investors in excess of 4%. Investors are essentially getting paid to wait for the potential of better times ahead.

Pfizer is also sitting on a stockpile of cash that's actually larger than it was before it announced its acquisition of Wyeth, which it paid for through a combination of stock and loans. Sure, some of its cash flow will have to go to service its $43 billion in long-term debt, but the company has remained in good shape to make small acquisitions or sign licensing deals.

Anemic growth, but not where it counts
Amgen has had its struggles of late. Cutbacks in the use of its anemia drugs have contributed to anemic revenue growth -- down 2%, in fact. But the company was still able to increase free cash flow by keeping costs in check.

Despite the solid cash flow and a bank account that's busting at the seams, Amgen doesn't offer a dividend. The company has lowered its outstanding share count by more than 20% since 2004 through buybacks, but it would be nice for Amgen to start sharing the cash with investors through a dividend. Don't count on it, though; it's easy for companies like Amgen, Apple (Nasdaq: AAPL), and Google (Nasdaq: GOOG) to justify hoarding their cash by simply invoking the we-need-it-for-acquisitions-and-investments justification.

Buying its way into diversification
Gilead is trading at the highest multiple of the bunch, but it also has the best chance of increasing its free cash flow. In fact, free cash flow increased by more than 40% between 2008 and 2009.

The secret to Gilead's success is its HIV drug franchise. Sales of its top product, triple-drug cocktail Atripla, were up a whopping 50% in the fourth quarter. The HIV pipeline looks equally impressive, with a quad-drug cocktail in the works.

Gilead's plan to diversify away from HIV drugs hasn't been quite as successful as investors could have hoped, however. Heart drug darusentan recently flopped, and sales of Ranexa, which Gilead got in last year's acquisition of CV Therapeutics, haven't been all that impressive.

Still, given the free cash flow that Gilead has been able to throw off, it should be able to try again with another acquisition soon enough.

Don't forget about the green stuff
With drug companies, it's especially easy for investors to zero in on revenue and earnings. There's something intoxicating about seeing a company getting a drug approved and generating its first revenue -- and subsequently, its first profit.

But as companies mature, cash flow becomes increasingly important. If you're going to invest in the more mature companies, you need to make your way from the income statement over to the cash flow statement. That's where hints of the company's true health reside.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool owns shares of GlaxoSmithKline and has a disclosure policy.