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No. of Recommendations: 1
hey folks,

I have been examining the largest six pharmaceutical companies (GSK, PFE, MRK, JNJ, BMY, NVS), and I need to whittle these down to at least four so I can do more extensive research. I used the Rule Maker spreadsheet to evaluate all six business purely on their fundamentals. When I do this, Johnson and Johnson and Merck both have the lowest scores (due to lower gross and net margins, slower sales growth, etc.) Can anyone here suggest a reason why I should keep these guys on the list? I feel like I need to do something to keep my research on track since I have limited time, and right now according to the spreadsheet (based purely on the most recent 10-Qs of each company, with none of the subjective numbers filled in by me), GlaxoSmithKline (28), Novartis (23), Pfizer (22), and Bristoll-Myers-Squibb (20) look most attractive to me, in that order. Again, those numbers reflect NONE of the subjective categories being filled in by me-- that's what I will do during the next phase of research :-)

what do you all think? Thanks!

-Mike
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No. of Recommendations: 1
hey folks,

I have been examining the largest six pharmaceutical companies (GSK, PFE, MRK, JNJ, BMY, NVS), and I need to whittle these
down to at least four so I can do more extensive research. I used the Rule Maker spreadsheet to evaluate all six business purely
on their fundamentals. When I do this, Johnson and Johnson and Merck both have the lowest scores (due to lower gross and net
margins, slower sales growth, etc.) Can anyone here suggest a reason why I should keep these guys on the list?



Well TMF just bought JNJ after giving it a third-tier rating. I think that maybe the spreasheet is better at focusing your attention on potential benefits/problems than it is at making investment decisions.


Morris
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No. of Recommendations: 17
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)

http://www.better-investing.org/bits/pfizer-may00.pdf

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:

http://www.fool.com/news/indepth/pharma.htm?REF=OINWID

------------------------------

From the recent RM Seminar - these Fools researched pharmas:

Johnson & Johnson summary by cmlevesque
http://boards.fool.com/Message.asp?mid=14711140


NYSE: JNJ) Johnson & Johnson
265. L1 johnson and Johnson by yehudith
http://boards.fool.com/Message.asp?mid=14490493
711.L2 http://boards.fool.com/Message.asp?mid=14525276 and
718. L2 http://boards.fool.com/Message.asp?mid=14525560
935. L3 http://boards.fool.com/Message.asp?mid=14542744
998. L3 http://boards.fool.com/Message.asp?mid=14549962

329. L1: JNJ by paiau
http://boards.fool.com/Message.asp?mid=14493729

409. L1. Johnson and Johnson by pvcolton
http://boards.fool.com/Message.asp?mid=14499594

(NYSE: MRK) Merck & Co.
205. L1 research: Merck (MRK) musicmaker
http://boards.fool.com/Message.asp?mid=14488298
620. L2. http://boards.fool.com/Message.asp?mid=14518691
780. L3 http://boards.fool.com/Message.asp?mid=14531713
1161. L4 http://boards.fool.com/Message.asp?mid=14571430
1310. L5 http://boards.fool.com/Message.asp?mid=14591012
1458. L6 http://boards.fool.com/Message.asp?mid=14620497

520. L1-MRK by ihtfp83 and 580
http://boards.fool.com/Message.asp?mid=14506690 and
http://boards.fool.com/Message.asp?mid=14514940

754. L2 http://boards.fool.com/Message.asp?mid=14529676
763. L2 2 of 3 http://boards.fool.com/Message.asp?mid=14530496
767. L2 3 of 3 http://boards.fool.com/Message.asp?mid=14530572 and
775. http://boards.fool.com/Message.asp?mid=14531217
990. L3. http://boards.fool.com/Message.asp?mid=14549712
1125. L3 http://boards.fool.com/Message.asp?mid=14564303
1268. L5 http://boards.fool.com/Message.asp?mid=14583293
1602. L6 http://boards.fool.com/Message.asp?mid=14636090

1022. L2 http://boards.fool.com/Message.asp?mid=14551077
535 L1 http://boards.fool.com/Message.asp?mid=14507914
1232. L3 http://boards.fool.com/Message.asp?mid=14577030
1398. L4 http://boards.fool.com/Message.asp?mid=14609802
1508. L5 http://boards.fool.com/Message.asp?mid=14624726
1589 L6 http://boards.fool.com/Message.asp?mid=14635141

467. L1 Johnson & Johnson (JNJ) by mayacourt
http://boards.fool.com/Message.asp?mid=14501718
806. L2 http://boards.fool.com/Message.asp?mid=14533496
1018. L3 http://boards.fool.com/Message.asp?mid=14550941
1202. L4 http://boards.fool.com/Message.asp?mid=14575819
1396. L5 http://boards.fool.com/Message.asp?mid=14609665
1512. L6 http://boards.fool.com/Message.asp?mid=14625674

(NYSE: PFE) Pfizer …and Rule Maker Port
137. L-1 Pfizer (PFE). By Bargainseeker
http://boards.fool.com/Message.asp?mid=14484120

139. Pfizer (PFE). Jmartyc
http://boards.fool.com/Message.asp?mid=14484414

332. L1 http://boards.fool.com/Message.asp?mid=14493908
640 L2. http://boards.fool.com/Message.asp?mid=14520605
659. L3 http://boards.fool.com/Message.asp?mid=14545060
1253. L4 http://boards.fool.com/Message.asp?mid=14580464
1342. L5 http://boards.fool.com/Message.asp?mid=14596774
1510. L6 http://boards.fool.com/Message.asp?mid=14625637

221. Lesson 1 HW: Pfizer: PFE, by HandsomeHarry
http://boards.fool.com/Message.asp?mid=14488940

240. Lesson 1 - Pfizer PFE, by wandacarp
http://boards.fool.com/Message.asp?mid=14489548

866. L2 http://boards.fool.com/Message.asp?mid=14538241
888. L3 http://boards.fool.com/Message.asp?mid=14540978
1249. L4 http://boards.fool.com/Message.asp?mid=14579576
1516. L5 http://boards.fool.com/Message.asp?mid=14625865
1517. L6 http://boards.fool.com/Message.asp?mid=14625980
567. outlawd L1
http://boards.fool.com/Message.asp?mid=14512719
871. L2 http://boards.fool.com/Message.asp?mid=14538920
631. L2 jaroman
http://boards.fool.com/Message.asp?mid=14519410
RJS100 PFE analysis part 1
http://boards.fool.com/Message.asp?mid=14723546
RJS100 PFE analysis part 2
http://boards.fool.com/Message.asp?mid=14724566

RJS100 PFE analysis part 3
http://boards.fool.com/Message.asp?mid=14726721
RJS100 PFE analysis part 4
http://boards.fool.com/Message.asp?mid=14734629

RJS100 PFE analysis part 5
http://boards.fool.com/Message.asp?mid=14769414
RJS100 PFE analysis part 6
http://boards.fool.com/Message.asp?mid=14771210
johneyb post on PFE
http://boards.fool.com/Message.asp?mid=14733242
Rjs100 modified pfe part 6
http://boards.fool.com/Message.asp?mid=14779477

(NYSE: SGP) Schering-Plough
379. L1: Schering Plough SGP by nana3
http://boards.fool.com/Message.asp?mid=14498688

630 L1. http://boards.fool.com/Message.asp?mid=14519322
671. L2 http://boards.fool.com/Message.asp?mid=14523125
855. L3 http://boards.fool.com/Message.asp?mid=14537594
1163. L4 http://boards.fool.com/Message.asp?mid=14571647
1515. L5 http://boards.fool.com/Message.asp?mid=14625848
1520. L6 http://boards.fool.com/Message.asp?mid=14626225

452. L1:Schering-Plough (SGP) by Jerry7
http://boards.fool.com/Message.asp?mid=14501143
644. L2.http://boards.fool.com/Message.asp?mid=14520828
1155. L4 http://boards.fool.com/Message.asp?mid=14568653
1550. L6 http://boards.fool.com/Message.asp?mid=14629259

---------------------------------

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.

Best,
Ev








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No. of Recommendations: 4
Woops - one more thing from my last post.

The "revised" RM qualitative criteria:

1. At least one sustainable competitive advantage

A. a study of the competition
1.) Dominant brand
2.) Patent Protection
3.) De Facto Standard
4.) Superior Engineering/ Manufacturing
5.) Superior Customer Service
6.) Low-cost producer

B. power of buyers
C. power of suppliers
D. threat of new entrants
1.) Consumer monopoly
E. Threat of substitute products

1.) De Facto Standard
2. Great management of competence and integrity
A. Unquestionable integrity
B. Commitment to new product development
C. Outstanding labor and personnel relations
D. Outstanding executive relations
E. Managerial Depth
F. Long-range outlook on profits
G. Open communications with investors

3. Clearly identifiable expanding possibilities for growth
A. Will the company be more or less relevant in the future?
B. Does the company compete in an industry that will support growth?
C. Does the company have lots of options to grow?

4.. A reasonable purchase price that will allow 100% (2x) growth in five years


Ev

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No. of Recommendations: 1
Mike,

Keep in mind also that part of the reason for Merck's lower margins are its Merck-Medco divisions which is a pharmaceutical benefits manager. This is more of a low margin, high turnover type of business.

With Johnson and Johnson, they have the consumer products division (band-aids, shampoo, etc) that drags down margins from the Pharmaceutical and Professional Divisions.

Both of these give the companies slightly more diversification than a pure play drug company. I once read that with the Merck-Medco division, Merck is positioned well in case pharmas become more regulated.

yofluke

Disclaimer: I owned both MRK and JNJ

----
hey folks,

I have been examining the largest six pharmaceutical companies (GSK, PFE, MRK, JNJ, BMY, NVS), and I need to whittle these down to at least four so I can do more extensive research. I used the Rule Maker spreadsheet to evaluate all six business purely on their fundamentals. When I do this, Johnson and Johnson and Merck both have the lowest scores (due to lower gross and net margins, slower sales growth, etc.) Can anyone here suggest a reason why I should keep these guys on the list? I feel like I need to do something to keep my research on track since I have limited time, and right now according to the spreadsheet (based purely on the most recent 10-Qs of each company, with none of the subjective numbers filled in by me), GlaxoSmithKline (28), Novartis (23), Pfizer (22), and Bristoll-Myers-Squibb (20) look most attractive to me, in that order. Again, those numbers reflect NONE of the subjective categories being filled in by me-- that's what I will do during the next phase of research :-)

what do you all think? Thanks!

-Mike
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No. of Recommendations: 1
Wow! These have been really helpful replies. WallStGal, I was especially grateful to see how much research has already been done by others. That might speed things up for me. It might take me a long time, but by the time I pick out 1-2 of these companies to invest in, I'll be pretty sure of having a good bet!

Yofluke, I found your reply interesting. I didn't realize these other business lines were contributing factors to lower margins. I have found similar confusion in the research I did on Food & Beverage companies...I found PepsiCo compare to Coke many times, when 50%+ of PepsiCo is a food company!

I was hoping to narrow the universe of drug companies down, but I guess I will have to dig a little deeper. Can anyone recommend any other ways of selecting three or four of GSK, PFE, MRK, JNJ, BMY, NVS for further study?

-Mike
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