Skip to main content
number cruncher

What are we looking for?

In addition to the controversy swirling around Valeant Pharmaceuticals International Inc., the health-care sector has been further damaged on news some companies have increased drug prices after buying them from competing firms. Amid heightened interest in the sector, my colleague Sean Pugliese and I thought we would take a closer look at some pharmaceutical stocks this week.

The screen

We started with companies that trade on the NYSE, or have American depositary receipts that trade in the United States. They had to be larger than $45-billion (U.S.) in market capitalization, and we sorted them from the largest to the smallest. In addition, our companies had to have a forecasted dividend yield of more than 2 per cent over the next 12 months based on analysts' estimates.

Other metrics we looked at:

– R&D/net sales (research and development divided by net sales) shows how much these companies spent on R&D as a percentage of net sales.

– EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization) is a value ratio that looks at a firm the way a potential acquirer would, and a low number is preferred. This ratio can also be called the takeover multiple.

– The forward price-to-earnings (P/E) ratio is the current share price divided by earnings estimates over the next 12 months based on analysts' consensus. Generally a low number is preferred.

We are also showing the total return for the past 12 months based on the closing prices on Oct. 22.

What did we find?

Bristol-Myers Squibb Co. has the highest one-year total return, the highest R&D/net sales, but also the highest P/E and highest takeover multiple.

Teva Pharmaceutical Industries Ltd. is the largest generic drug producer in the world and therefore has a very low R&D/net sales and the company has one of the most attractive P/E ratios as well as the best takeover multiple.

Investors should conduct further research or contact an investment professional before buying any of these companies.

Michael Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients.

Pharmaceutical stocks