What are we looking for?
Pharma giants with strong liquidity and efficient cost controls.
The screen
One factor inextricably tied to market sentiment these days is the role of pharmaceutical companies in finding an effective treatment or vaccine for the coronavirus. Although most medical experts state that a vaccine is 12 to 18 months away, we can still examine the current pharmaceutical landscape and how well equipped certain companies are to develop and scale a solution.
- We start by looking at pharmaceutical firms headquartered in North America with a market capitalization greater than US$10-billion.
- Next, we use the quick ratio as a proxy for short-term liquidity. The quick ratio compares a company’s short-term assets and liabilities, with a higher number indicating that a firm is more readily able to meet its current debt obligations. For example, a quick ratio of two means that the firm can pay its short-term debt two times over. In this case, we screen for companies with a quick ratio greater than 2.25 – double the sector average.
- Finally, we screen for companies with an average annual operating margin greater than 15 per cent over the past five years. Operating margin allows us to focus on those companies that have been able to efficiently control their operating costs, such as those related to wages and research and development.
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What we found
Ranked by average five-year operating margin, the screen surfaced five companies. Most of these fall into the biotechnology subsector where the focus lies on drug development and medical research. We highlight three:
Abbvie Inc. has seen its stock price jump by 27 per cent from the March 23 market low caused by the COVID-19 lockdown. The company beat analysts’ consensus on earnings by more than 7 per cent when it reported first-quarter results last week and it’s the only company on our list with a dividend yield of close to 6 per cent. It has also made no mention of either cutting or suspending its dividend. One risk Abbvie faces is the integration of Allergan as it seeks to complete the US$63-billion transaction by May. Randall Stanicky, an analyst at RBC Dominion Securities, noted on April 20 that this could create some stock disruptions for the firm, but 2021 should see a bounce-back, likely owing to its strong competitive position in the industry postacquisition. Abbvie is supporting clinical research for the coronavirus with its HIV treatment, Kaletra, with initial results expected this month.
Alexion Pharmaceuticals Inc. already has two continuing clinical trials in their penultimate phase as it seeks Food and Drug Administration approval for Ultomiris, a rare-disease drug it aims to repurpose to treat coronavirus patients. Compared with the other firms in the screen, Alexion has historically been more geographically diversified, with the United States making up less than half of its revenue in 2017. With a larger presence in European and Asian markets, the company can take advantage of international demand should its treatments advance to Phase 4 clinical trials.
Finally, Gilead Sciences Inc. has seen its stock price rise 23 per cent year-to-date, fuelled in part by the successful preliminary testing of its antiviral coronavirus drug remdesivir. Furthermore, the firm beat earnings expectations last week and finds itself with a sizable cash balance, showcasing efficient cost management and topping our list with a five-year average operating margin close to 50 per cent. As the race for a coronavirus treatment and vaccine heats up, Gilead looks well-positioned to scale and meet future demand.
Investors are advised to do their own research before trading in any of the securities shown.
Mansoor Elahi is a customer success manager supporting Refinitiv’s investment and advisory solutions.
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