According to Lilly’s CFO Derica Rice, the company doesn’t have plans to sell or break off its animal division, a move that was recently made by Pfizer.
Merck & Co., Inc. (NYSE:MRK) and Generics
After several setbacks and tougher competition, Merck & Co., Inc. (NYSE:MRK), the second-largest U.S. drug maker, has lowered its 2013 year’s profit forecast. Issues during the research phase of new drug development have been keeping the company from launching new drugs. Meanwhile tougher generic competition has hit sales of its top-selling drug, Singulair, been cutting into its earnings. The aforementioned drug used to be one of the cornerstones in asthma treatment, yet its earnings have dropped since it lost its patent protection. Just last year it posted a sales drop of $480 million, or nearly 70%.
Even as analysts and investors are suggesting both a restructuring of the company and the possibility to sell off its non-pharmaceutical units, Merck’s CEO Ken Frazier stated he has no plans to follow Pfizer’s steps and break off its animal unit. Frazier stated, “We are committed to the business. We think it is a good business, it dovetails nicely with our human health business.”
Investor concerns about Merck’s inability to launch new products were also justified by the announced delay to its submission of Odanacatib for U.S. approval. The experimental osteoporosis drug’s submission has been delayed until 2014, a year later than originally planned. Its development will wait on results of a second large study to confirm or deny some potential adverse effects noted during the previous study. This delay also adds to the announcement in December that Merck wouldn’t seek approval for Tredaptive, a new cholesterol treatment, while in June the drugmaker didn’t get clearance for an experimental chemotherapy against sarcoma. Smead Capital Management’s CEO Bill Smead stated during a telephone interview, “I think the few players that are involved in these stocks are getting impatient, they have been tested for years. They want something that is going to gratify them in six months, but this is a great three- to five-year play.”
Valuation
Ideally investors would want attractive valuations and good prospects for spin offs. Instead, they are presented with pricey valuations for Merck and Pfizer:
| Ticker | Company | P/E | P/S | P/B | EPS Growth Next 5 Years |
| ABT | Abbott Labs | 9.15 | 1.36 | 2.01 | 10.4% |
| MRK | Merck | 19.1 | 2.67 | 2.26 | 3.4% |
| PFE | Pfizer | 21.42 | 3.37 | 2.43 | 2.5% |
| LLY | Eli Lilly | 14.7 | 2.76 | 3.75 | -6.0% |
Eli Lilly is cheaper on a price-to-earnings basis, but is less interested in reorganization. It is not attractive based on its current prices and direction.
In contrast, Abbott Laboratories represents a better way to invest in drug makers. It is cheap even for a generic drug maker, and has better growth prospects than other drug companies on this list.
The article The Better Way To Play Drug Makers originally appeared on Fool.com and is written by Bill Edson.
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