What are we looking for?
Large pharmaceutical/biotech companies that are insulated from the risks that Valeant Pharmaceuticals' investors were exposed to.
Last July, Valeant surpassed RBC as the largest company (by market cap) on the S&P/TSX. Like Nortel and BlackBerry before it, however, its reign at the top was brief. Since last July, the share price has tumbled and more than $100-billion of shareholder wealth has been wiped out.
Pharmaceutical giants are generally considered relatively safe investments – the demand for their products is relatively stable through good and bad economic times. But Valeant was hurt by the uncovering of questionable accounting practices, and an aggressive streak of acquisitions that saddled the company with a $30-billion debt burden.
So how can we pick a large pharmaceutical company that is safe from the risks that led to Valeant's fall?
The screen
We are looking for a large, North-American pharma company with strong governance in regards to audit and a low debt level.
- Company must have a market cap greater than $50-billion (U.S.);
- Company must have an audit committee that is 100-per-cent independent of company management;
- Debt must be less than 20 per cent of company value.
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What did we find?
The screen yields a list of eight companies, including blue-chip household names such as Merck, Pfizer and Johnson & Johnson. It also includes lesser-known companies that have very attractive potential for growth, such as Celgene Corp. Celgene is engaged in cancer treatment therapies. A patent ruling at the end of 2015 ensures that its top product, Revlimid (for anemia, multiple myeloma and cancer treatment), will have more than 10 years to grow and sell with no competition. Celgene also has a strong pipeline of products – a sign the company should be able to sustain growth organically – as opposed to Valeant's strategy of growing through acquisitions.
Investors are encouraged to do their own research before investing.
Hugh Smith works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.