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Hello Mike, (sorry for the way too long post - one thing led to the next)

You've taken on a good project - something I've wanted to do for a long time - really examine the big pharmas. This may be more than you want to know on the subject.

FWIW I wouldn't eliminate the two lowest RM quantitative score candidates until I put together the bigger picture of evaluating the companies from a qualitative viewpoint. I know there is only so much time in the day to do stock research, however I'd just skip over the subjective numbers on the RM Ranker. There have been changes to the criteria, and I don't really know how much you would know about each companys "future" potential.

Perhaps this article (written by a friend of mine) - will provide a good overview of the pharmaceutical industry as a starting point. (7 page adobe acrobat files)

I saved these criteria from somewhere, and now can not locate the source, but perhaps will be of some use in your study: (I'll search around for the source and post if I find it)

A thorough examination of the company's products and markets is the first step. The company's drug portfolio is the main ingredient of its success. Does the company mainly sell higher margin prescription products?

Are the company's drugs adequately patent-protected? It is imperative to determine when a company's patents on its principal drugs expire.

Check R&D as a percentage of sales. With new drugs representing the lifeblood of the pharmaceutical industry, changes in this statistic can have an important affect on future trends in sales and earnings. The drug industry devotes a higher percentage of sales to R&D than any other industry does. Most leading drug-makers spend between 14% and 18% of their revenues on R&D. However, estimated industry R&D in 1999 will account for 20.8% of total revenues, up from 16.2% in 1990 and 11.4% in 1980.

Has the company formed any promising alliances? Large firms often benefit from alliances with smaller biotechnology and biopharmaceutical firms working on new drugs. And smaller companies may find it necessary to team up with a larger partner to fund the clinical trial and marketing and sales of their discoveries.

What is the company's international profile? While the US remains the most important market for US and many foreign drug-makers, check which foreign markets the company has entered or is planning to enter.

How effective is the company in working with the FDA? A firm must be able to work with and understand the criteria of the FDA. Here again size and experience can help. Besides new drug applications, the FDA also inspects and monitors plants for product integrity and quality control.

For non-prescription drug-makers, check advertising budgets and effectiveness of brand-building campaigns to improve customer brand loyalty.

Compare rates of change for healthcare spending as a whole versus pharmaceutical spending. Over the 8 years through 1998, spending on prescription drugs grew at an average annual rate of 8.9%, outpacing the 6.4% rate of growth for overall healthcare spending.

Consumer Price Index. During the 1980s and early 1990s, drug-makers weren't overly concerned with changes in the CPI. In recent years, however, heightened political attention to past hyperinflation in drug costs and fear over possible regulatory controls have resulted in slower inflation in drug pricing. In the 1980s, drug prices surged at an average annual rate of 9.6%, compared with the 4.1% average CPI rate. Drug price inflation slowed considerably during 1994-97, almost matching the 2.7% CPI annual increase. In 1998, however, prescription drug prices have begun to accelerate, rising 4.9%, as compared to a 1.6% increase in the CPI. Don't expect prices to rise much faster, though, without either a consumer or political outcry.

Foreign Currency Exchange. Since drug-makers derive close to 40% of their total sales from foreign customers, they carefully monitor the value of the dollar compared with foreign currencies. A rise in the value of the dollar compared to foreign currencies lowers foreign sales and earnings, because these then translate into fewer dollars. A stronger dollar also makes US goods more expensive overseas, and foreign products more competitive in the US.

Analyzing Financial Statements:

What are the company's sales trends? Is growth steady and consistent, and how has it been achieved: through volume, pricing, acquisitions, or some combination of these?

How wide are margins? Though they have contracted in recent years, operating margins still exceed 30% as an industry average. And net earnings as a percentage of sales averaged about 17% over the last 5 years.

Return on Stockholder's Equity for pharmaceutical companies has averaged more than 25%, among the highest of all industries.

Check the company's cash flow. For drug-makers, cash flow (essentially net earnings plus depreciation) as a percentage of sales is higher than 20%, more than double the average percentage for industrial companies.

Debt leverage varies significantly among drug-makers. However, the ration of long-term debt to total capital is in the 10% - 15% range for most leading companies.

You might find this section of TMF helpful - particularly the 5 steps of drug development article:


From the recent RM Seminar - these Fools researched pharmas:

Johnson & Johnson summary by cmlevesque

NYSE: JNJ) Johnson & Johnson
265. L1 johnson and Johnson by yehudith
711.L2 and
718. L2
935. L3
998. L3

329. L1: JNJ by paiau

409. L1. Johnson and Johnson by pvcolton

(NYSE: MRK) Merck & Co.
205. L1 research: Merck (MRK) musicmaker
620. L2.
780. L3
1161. L4
1310. L5
1458. L6

520. L1-MRK by ihtfp83 and 580 and

754. L2
763. L2 2 of 3
767. L2 3 of 3 and
990. L3.
1125. L3
1268. L5
1602. L6

1022. L2
535 L1
1232. L3
1398. L4
1508. L5
1589 L6

467. L1 Johnson & Johnson (JNJ) by mayacourt
806. L2
1018. L3
1202. L4
1396. L5
1512. L6

(NYSE: PFE) Pfizer …and Rule Maker Port
137. L-1 Pfizer (PFE). By Bargainseeker

139. Pfizer (PFE). Jmartyc

332. L1
640 L2.
659. L3
1253. L4
1342. L5
1510. L6

221. Lesson 1 HW: Pfizer: PFE, by HandsomeHarry

240. Lesson 1 - Pfizer PFE, by wandacarp

866. L2
888. L3
1249. L4
1516. L5
1517. L6
567. outlawd L1
871. L2
631. L2 jaroman
RJS100 PFE analysis part 1
RJS100 PFE analysis part 2

RJS100 PFE analysis part 3
RJS100 PFE analysis part 4

RJS100 PFE analysis part 5
RJS100 PFE analysis part 6
johneyb post on PFE
Rjs100 modified pfe part 6

(NYSE: SGP) Schering-Plough
379. L1: Schering Plough SGP by nana3

630 L1.
671. L2
855. L3
1163. L4
1515. L5
1520. L6

452. L1:Schering-Plough (SGP) by Jerry7
644. L2.
1155. L4
1550. L6


Again, sorry for the length - it just kept growing, perhaps I need to "dig-into" these pharmas myself<G>!
Hope you find something of interest through all this.
Good luck on your study.


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