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Is Bigger Better When it Comes to Big Pharma? Pfizer Inc. (PFE), Merck & Co., Inc. (MRK), Eli Lilly & Co. (LLY)

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The demand for drugs worldwide is expected to increase due to emerging markets abroad and more specifically, due to an influx of demand from the aging “Baby Boomers” domestically. Many pharmaceutical companies are poised to benefit, especially the ones with strong drug line-ups. The company I currently like the most in the “Big Pharma” sector is Pfizer Inc. (NYSE:PFE), and here are 3 reasons why.

Pfizer Inc. (NYSE:PFE)

1.) It’s the biggest player in town…

Pfizer is the largest research-based pharmaceutical company in the world. Besides being the largest, the company also sports a relatively strong balance sheet with an increasing emphasis on cash:

Pfizer also has a strong portfolio consisting of popular brand name drugs such as Zoloft, Lipitor, Viagra, etc. The company also offers popular consumer products, such as Chapstick.

2.) It’s trading at a discount to peers…

Pfizer Inc. (NYSE:PFE) seems to be discounted to peers such as Merck & Co., Inc. (NYSE:MRK), Eli Lilly & Co. (NYSE:LLY), Bristol Myers Squibb Co. (NYSE:BMY), and Johnson & Johnson (NYSE:JNJ)

P/E Forward P/E Dividend (Yield) Market Cap (billions)
PFE 14.44 11.87 0.96 (3.40%) $201.44
MRK 22.05 11.6 1.72 (3.90%) $133.26
LLY 15.06 19.69 1.96 (3.60%) $60.29
BMY 33.59 17.95 1.40 (3.60%) $63.79
JNJ 20.52 13.75 2.44 (3.10%) $221.36

The company not only has the lowest trailing P/E ratio, but also carries one of the lowest P/Es going forward. Throw in a competitive dividend, and it looks like Mr. Market is offering a bargain for investors. Not only that, Pfizer Inc. (NYSE:PFE) also currently trumps its peers in generating free cash flow as well:

3.) Emerging markets are an opportunity for growth…

Emerging markets made up a good amount of the company’s revenue in 2012:

Courtesy of Statista

Increasing sales in growing and emerging markets should provide the opportunity for sustainable future growth. That said, nothing is for certain and no company is bulletproof.

And now, the bad news…

Like all pharmaceutical companies, Pfizer relies on patents to protect its signature products. When these patents expire, cheaper generics begin to eat away at these previous blockbuster cash-cows. For instance, largely as a result of the expiration of patents for one of its main moneymakers, cholesterol drug Lipitor, Pfizer Inc. (NYSE:PFE) experienced a 10% decrease in revenue last year.

Revenue may continue to slide this year as well, and it is imperative that the company continues to fund research and keep funding to support a strong pipeline of new drugs. Pfizer is not alone, either.

Bristol-Myers knows what it’s like to feel nervous over key patent loss as well. The company is facing the loss of patents for key moneymakers such as Plavix, which has already seen a 65% drop in sales from intense competition from generics, according to Forbes. The company’s Baraclude drug, worth over a billion dollars, is also being attacked sooner than expected, after a Delaware court invalidated patents related to the Hepatitis B drug.

Generics will continue to be an ongoing concern for many. Eli Lilly & Co. (NYSE:LLY) is still looking to replace revenue that will be lost to generics, now that its Zyprexa drug has lost exclusivety in the U.S. and Europe. The company is also scheduled to lose more patents in the latter part of the year for one of its key drugs, Cymbalta, as well as its Evista drug’s patents in 2014.

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