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Profits Are Good, Cures Are Better: The Pharmaceutical Industry
Posted by: Vanin Aegea (IP Logged)
Date: October 8, 2013 09:41AM

Pharmaceutical companies require a well-oiled research and development pipeline to stay in business. And a healthy cash flow is needed to feed the pipeline. Some invested liquidity will go to waste as some products die at the lab, and others do not reach the shelves. Even when successful, licenses eventually expire, pressuring R&D to develop replacements. AstraZeneca (AZN) and Pfizer (PFE) are two companies continuously striving to stay alive through research.

Fluid Pipeline

Part of the second group of global pharmaceuticals, AstraZeneca, is a British-Swedish firm with base in London. The firm conducts research, develops, manufactures and markets pharmaceuticals and agricultural products. And, as many industry competitors, the firm is easing license dropping through acquisitions and a wider respiratory portfolio. However, revenues have fallen in the last quarter by 4% year over year.

Now, AstraZeneca is facing stronger competitors of all sizes – small and big, original and generic. Hence, the R&D will be refurbished to raise the competitive bar and avoid past development shortcomings. Ahead, pipeline improvement, further acquisitions, and development of new partnerships describe the set business strategy. Additionally, new opportunities will be searched by a further penetration of developing countries.

The strengths of AstraZeneca are a strong portfolio, and specifically, the cardiovascular segment. Also, the company’s research and development pipeline detents a successful track for introducing innovative and successful products. Brilinta, the latest introduction, holds good prospects if it receives promotional support from doctors. Acquisitions however, show mixed results. MedImmune is the most telling example, where products are yet to deliver on its market promises.

AstraZeneca finances are moderate because cash flow continues to decline while debt rises. Currently the stock trades at 13.7 times its earnings, carrying a 20% discount to industry earnings. I remain bullish and share Hotchkis & Wiley’s positive sentiment because of its strong brand recognition and opportunities at developing countries. Additionally, cost cutting policies continue to deliver positive results to mitigate dropping licenses.

Clogged Research & Great Opportunities

Headquartered in New York, Pfizer researches, develops, manufactures, and distributes bio-pharmaceuticals for humans and animals, with products divided among 5 segments. The firm is expected to loss eight important licenses in the following seven years. The last quarter reported a 7% drop on revenues year-over-year, due to the loss of exclusivity over several products. Additionally, pressures from generic drugs continue to rise.

Most urgently, Pfizer will try to unclog its R&D pipeline for the oncology, cardiology, metabolic disorders, neuroscience, immunology, inflammation and vaccines segments. By liberating the research obstruction, the firm will count in its portfolio with great potential to replace expiring licenses, and take leading position in several segments. Additionally, global operations facilitated access to emerging markets, and acquisitions will help to insulate the effect from expiring licenses. The acquisition of Wyeth in 2009 has served both objectives, and allowed the firm to create a lower and more flexible cost base.

Pzifer has developed an additional venue to growth. Through licensing deals and collaborative agreements, the company looks to develop and commercialize new products with partners like Merck and Protalix. Last, the firm also advances over acquisitions, for example, the consumer health care business Ferrosan.

Financially, Pzifer is strong because of a wide operating margin, rising cash flow and declining debt. The stock currently trades at 19.1 times its earnings, carrying a 17% premium to the industry average. I remain bullish and share James Barrow and Jeremy Grantham’s optimism – the two gurus holding the largest positions. I ignore the drop on revenues because prospects offered by the pipeline are strong.

Pipeline Rules

Pharmaceutical companies are under great pressure to develop successful products in order to remain in the game. Hence, an inefficient pipeline can bring down a whole business. AstraZeneca is the least exposed to such risk. Pfizer, however, is facing the challenge to introduce all the products. Hence, I prefer AstraZeneca over Pzfizer.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

Guru Discussed: James Barrow: Current Portfolio, Stock Picks
Stocks Discussed: AZN, PFE,
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