Friday, August 27, 2010

Top-Heavy Pharmaceuticals

Investors have been cautioned for decades not to put all their eggs into one basket, and numerous studies have shown savvy diversification can increase portfolio returns while simultaneously reducing risk. Companies put this same idea into practice - some structure themselves as concentrated pure plays, while others attempt to mitigate risk by developing multiple lines of revenue.

Looking specifically at the large-cap pharmaceutical space, there is an interesting mix between top-heavy companies that derive a significant amount of revenue from a handful of products and those with a broader sales base.

Why should investors care? Well, pharmaceutical companies not only have to contend with long-range risk factors like patent expiration (and generic competition) and branded drug competition, they also have to consider the possibility that post-approval studies will indicate problems with a drug's safety or efficacy. If investors think back to the issues with approved drugs like Vioxx, Raptiva and Zelnorm, or the recent controversy with Januvia, it is apparent that approvals are not permanent or irrevocable. It stands to reason, then, that investors should approach more concentrated companies with a bit more caution and expect something of a valuation discount. 


For the full article, click below:
http://stocks.investopedia.com/stock-analysis/2010/Top-Heavy-Pharmaceuticals-AMGN-NVS-PFE-LLY-MRK-SNY-BMY0827.aspx

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