All opinions are my own.

Thursday, March 26, 2009

Pharmaceuticals and Return on Investment (ROI)

Every reader is an investor. Investors know that there has to be a good return on their investment irrespective of the place of investment.

We have all been taught that different risks necessitate different ROI. For “low risk investments,” ROI of 10-24% is suggested, 24% being in Pharmaceuticals. The ROI range for “average risk” is about 15-40%. Again, 40% is for pharmaceuticals. ROI for high-risk investments should be 24-56% with 56% for Pharmaceuticals (1).

In the past few weeks, three major pharmaceutical mergers have been announced. Total investment is about $156 billion U.S. dollars. If the total investment is equally distributed between the three companies and each would like to have a “Five years ROI”, then [due to high risk] one should expect “before tax” return of about $20 billion dollars per year per deal. Another way to look at earning $20 billion/year is that the each company will have to have 10-20 blockbuster drugs on the market beginning in 2010. Based on each company’s pipeline, I just do not see such a gusher. Unless the acquiring players know something we do not know, I believe these are risky investments considering that less than 5% of drugs become blockbusters and past acquisitions and their assimilation have not been stellar.

I would like the readers to opine on the recent pharmaceutical investments, share their thoughts and what they think are the short and long-term options for pharmaceutical companies?

(1) J. Frank Valle-Riestra, Project evaluation in the chemical process industries, McGraw Hill 1983 p 433.

1 comment:

Ram said...

I think these mergers are about reducing costs. The oil industry went through this already in the 90's. There is a lot of bloat and not enough innovation.