Analyze Pharma stocks for investmentPerformed with XBRLAnalyst for Excel
Based on our comparative and fundamental analysis in XBRLAnalyst, the stocks of Alexion Pharmaceuticals (ALXN) is under-valued on the following grounds:
- Quarterly increase in stock value is 23%.
- Return on research capital is 6.2 which keeps it in top three performers.
- Liquidity situation is more than satisfactory.
- Profit margin is 34% which makes it at the top of the list.
- Price Earnings ratio is comparatively low.
In 2019, the US remained the world’s largest single pharmaceutical market, generating about $490 billion of revenue. Despite being solely a 0.2% increase from the previous year, the US market accounted for forty-eight percent of the worldwide pharmaceutical market. (ref.1). Top US pharmaceutical companies by revenue during the last quarter of the financial year 2020:
- Johnson & Johnson — $22.5 billion.
- AbbVie — $13.9 billion.
- Merck — $12.5 billion
- Viatris Inc — $12.0 billion.
- Eli Lilly — $7.4 billion.
Key Financial Metrics
Portfolio Quarterly Analysis:
According to the portfolio result indicated in the column “Quarterly % Change” of Excel Model, it is evident that the stock value has been increased by 35%, 25%, and 23% in favor of Eli Lilly & Co, Novavax Inc and Alexion Pharmaceuticals Inc., respectively.
Johnson & Johnson, Merck & Co, Pfizer, AbbVie, and Eli Lilly are dominating the pharmaceutical industry in the United States. They have invested 411.4(JNJ), 207.0(MRK), 205.3(PFE), 189.2(ABBV), and 169.8(LLY) billion dollars respectively according to the last quarter of the financial year 2020.
XBRLAnalyst: =FinValue(“ABBV”,”[Market Cap]”,”2020-FY”,,,”bln”)
As per the data and graph available on Quick Ratio, the liquidity position of the major pharma companies is rather delicate. The normal yardstick for this financial indicator is 1:1 but the figures are showing less than 1 for main companies for example Johnson & Johnson (0.6), Merck, and AbbVie are also both at 0.6. Pfizer and Viatris have a quick ratio of (0.5).
Alexion is indicating 2.7 as quick ratios which seem to be high. This shows that the liquidity situation is more than satisfactory, but this may also give clues towards unnecessary liquidity residing in the company.
The gross profit margin in the pharmaceutical industry seems to be relatively high for most of the companies ranging from 56 to 90 percent except for Catalent (35%) due to their excessive cost of production. The top performers under this financial indicator are Alexion, Eli Lilly, and Zoetis having a profit margin of 34%, 29%, and 20% respectively during the last quarter of the financial year 2020.
RORC (Return on Research Capital):
Return on research capital could be an element of productivity and growth since analysis and development is one of the ways that firms develop new purchasable merchandise and services. This metric is usually utilized in industries that trust heavily in R&D, like the pharmaceutical business.
The RORC (return on research capital) is that the quantity of profit earned against the amount spent on research and development at any given intervals (usually a year). This is calculated as current gross profits (typically found on the present year’s financial statement) divided by the previous year’s R&D expenses.
XBRLAnalyst: =FinValue(“ABBV”,”[Research & Development Expense]”,”2019-FY”)
The previous year’s R&D expenses are used because the payoff is not usually complete in the year of expenses. Rather, it is usually complete in some future point of time. One will fairly assume that higher returns mean that the corporate has spent sagely in terms of research and development and is getting the financial benefits from its struggle.
We can observe from the data available on Research and Development Expenses for pharmaceutical companies, Johnson & Johnson spent 12.2 billion dollars, 9.9 billion dollars by Merck, 8.7 billion dollars by Pfizer, and 6.4 billion dollars by AbbVie during the financial year 2019. These amounts seem to be impressive on an individual basis but when compared to their respective RORC, all these pharmaceutical companies are showing positive performance. On point is to be noted here that top pharma giants such as Johnson & Johnson, Merck, and Pfizer are indicating below-average positive performance. So far as this financial indicator is concerned that Zoetis (RORC: 10.1) and Perrigo (RORC: 9.7) and Alexion Pharmaceuticals (RORC: 6.2) are top performers.
This analysis is made expressly on annual figures because research expenditures are normally incurred on a long-term basis and especially its impact cannot be seen on a quarterly basis.
Risk and Reward Relationship:
Return on equity is exceptionally high for Eli Lilly (38%) which can be explained by the high total debt to equity ratio (2.8). A higher amount of debt can increase the company’s profit margin and ultimately more funds available for distribution among the shareholders. But at the same time, the credit risk associated with such type of investment strategy can also not be ignored.
ROE figures for Catalent (5.3%) and Zoetis (9.5%) are also indicating high returns. Catalent is performing well keeping in view the fact that the credit risk is low (total debt to equity ratio 0.9). On the other hand, Zoetis is taking comparatively higher credit risk (1.9).
Four types of valuation techniques were used to compare the worth of each pharma company selected. Enterprise Value was compared with Revenue, Gross Profit, and EBITDA (Earnings before interest, taxes, and depreciation) figures of these companies. Price Earnings Ratio is equally calculated. These calculations can be reviewed in the table above and in the Excel model in the Spreadsheet “Quarterly Comps Table”. Then, these figures were compared with the average figures calculated for the pharma industry at the end of this template.
The companies (Merck, Pfizer, Novavax, and Moderna) have a negative EV/EBITDA ratio which means that they have enough net cash to pay off all debts and can buy back all their stocks if needed. But at the same time, these companies have a negative price-earnings ratio which demonstrates bankruptcy risk, if the situation remains consistent.
There is another point to be noted that these companies have already signed an attractive contract for the delivery of covid-19 vaccine with the US Government and the demand for this medicine will remain intact in near future, thus there is the possibility that PE (Price/Earnings) ratio may become favorable in the incoming period.
Alexion Pharmaceuticals is another company that needs to be observed. Its stock price is low as compared to its earnings which are evident from the low PE ratio when it is compared with the average figure for the pharmaceutical industry. Enterprise Value/Revenue is also on the lower side when compared with its industry figure. This makes Alexion’s stock attractive.
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