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Thinking Smaller Is Big for Big Pharma: Eli Lilly & Co. (LLY), Sanofi SA (ADR) (SNY), Bristol Myers Squibb Co. (BMY)

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Do good things come in small packages for big pharma? Most of investors’ attention is given to blockbuster drugs and drugs that have the potential to be blockbusters. Should we be thinking smaller, though?

I explored the impact of blockbuster drugs on several big pharmaceutical companies recently and concluded that investors should pay more attention to the lesser drugs in companies’ portfolios. My Foolish colleague Brian Orelli had a similar message in one his recent articles. Brian’s premise is that the blockbuster model is breaking. He cautioned that investors need to prepare for a largely post-blockbuster world in pharma.

With all of this in mind, I decided to take a look at how big pharmas with more smaller-dollar drugs have fared and which companies seem best positioned for the future assuming blockbuster drugs become less important. Here’s what I found.

The power of “other”
Every pharmaceutical company plays up the success of their major money-making drugs. Most of them take pains to explain why the drugs achieved solid gains or experienced losses in a given time period. Drugs that aren’t bringing in as much revenue are listed but don’t typically receive much attention. Then there’s the group of drugs that aren’t even mentioned by name. These drugs are lumped together in an “other” category.

My focus was these “other” drugs. With so many big pharma companies losing revenue from blockbuster drugs going off patent, I suspected that the ones with more of the “other” lower-dollar drugs would tend to perform better. The thought was that having a solid revenue stream from a large mix of lesser drugs could help cushion some of the blow from the patent cliff and therefore lead to better stock performance. Was my hunch on target?

Source: Company 10-K reports and annual reports.

The above chart compares the two-year stock performance of several big pharmaceutical companies against the percentage that sales of “other drugs” made up of total 2012 revenue. The trend line shows what I expected: The stock performance for companies with more revenue from smaller drugs tended to outperform that of companies with less revenue from these drugs.

AstraZeneca plc (ADR) (NYSE:AZN) had the second-lowest “other drug” revenue percentage and came in with the lowest two-year stock performance. Sanofi SA (ADR) (NYSE:SNY), Bristol Myers Squibb Co. (NYSE:BMY), and Pfizer Inc. (NYSE:PFE) ranked at the top of the list in terms of other drugs as a percentage of total revenue. These three companies also were in the top four with respect to stock performance.

Eli Lilly & Co. (NYSE:LLY) jumps out as an outlier, though. The company actually ranked first for stock performance, with shares climbing 58% over the past two years. However, Eli Lilly & Co. (NYSE:LLY) was in the bottom three for other drugs revenue. The perception that Lilly was a better buy could have been a factor in its outperforming the others in share gains. The company’s earnings yield was consistently higher over the past couple of years than Sanofi SA (ADR) (NYSE:SNY)’s or Bristol Myers Squibb Co. (NYSE:BMY)’s.

Wagging the long tail?
Chris Anderson popularized the term “the long tail” several years ago with his book by the same name. His theory (and subtitle of his book) was that the future of business was in selling less of more. There are always exceptions, of course, but I think that we will see the long tail effect manifest itself more in the world of pharmaceuticals in the years ahead.

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