There Is Big Money in Drugs.. Legal Ones! – Pfizer Inc. (PFE), Merck & Co., Inc. (MRK), Eli Lilly & Co. (LLY)

With such win-loss payoff profiles, Pfizer Inc. (NYSE:PFE) can the majority of the time be an abysmal failure yet the 2 or 3 successes are more than enough to produce healthy profits.

Eli Lilly & Co. (NYSE:LLY)

Eli Lily offers virtually the same potential as Pfizer. With 13 drugs in Phase III trial stages, the odds of a huge, successful blockbuster can afford to be low and still a success.

Eli Lily has shown that it is resilient in the face of a ‘patent cliff’ by continuing to perform well even as a number of patents expired in 2011/12.

With the world seemingly becoming more unhealthy as each year passes, all three companies are positioned to profit handsomely. With the nature of the industry a breakthrough product can produce enormous profits.

Applying a view

Having discussed the prospects of these three companies and why I am bullish on them, my attention now turns to how can I best apply the bullish view.

Long term calls on Merck, Pfizer Inc. (NYSE:PFE) and Eli Lily are all trading at levels of volatility that is quite low.

January 2015 at the money calls are trading at a premium equal to approximately 8-10% of the share price.

To me, paying 8% for an at the money call on a stock with 22 months until expiration is a very low risk proposition. Especially when the underlying companies have the capacity to produce unexpected and outsized profits.

The nature of the industry is freakish large profits can occur, paying 8% for two years of upside exposure to this to me fits the criteria of linear loss / non-linear win profile.

The article There Is Big Money in Drugs.. Legal Ones! originally appeared on Fool.com and is written by Jarrod Bailey.

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