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Why Buffett Is Just Saying No to These Drug Majors: Bristol Myers Squibb Co. (BMY), Eli Lilly & Co. (LLY), AstraZeneca plc (ADR) (AZN)

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Warren Buffett Coca-Cola Company (KO)Global pharmaceutical giants AstraZeneca plc (ADR) (NYSE:AZN), Bristol Myers Squibb Co. (NYSE:BMY), and Eli Lilly & Co. (NYSE:LLY) meet most of the growth and profitability criteria that Warren Buffett’s basic strategy is based on. So why isn’t he buying them?

How they fit into Buffett’s strategy

Below is a checklist for choosing companies that should offer steady returns and minimize losses during general economic downturns. Earnings per share figures tend to jump around from quarter to quarter. I used annual EPS figures from the years 2003 and 2012 to calculate average annual EPS growth. Book value per share is less volatile, so I used quarterly figures from periods ending March 2003, and December 2012.

AstraZeneca Bristol-Myers Squibb Eli Lilly
Return on assets 12.06% 5.80% 12.28%
Return on equity 27.70% 12.98% 27.81%
Average annual EPS Growth ‘03-’12 10.83% -3.10% 4.44%
Average annual book value per share growth ‘03-’12 6.77% 4.47% 5.10%
Current dividend yield 8.32% 3.69% 3.51%
Long term debt $9.41B $7.39B $5.52B
TTM net income $6.30B $1.96B $4.09B

Data source: Company SEC filings and YCharts

Returns on assets are a good quick measurement of how effectively a company is managed. If a pharmaceutical company invests in a shiny new laboratory, its fancypants scientists need to use it to develop some profitable drugs or this number falls. Eli Lilly & Co. (NYSE:LLY)’s 12.28% return on assets is the highest in its industry.

With respect to earnings growth, AstraZeneca plc (ADR) (NYSE:AZN) is the clear leader here. Eli Lilly posted a rare loss of $1.89 per share for the entire year of 2008 but has otherwise been growing at a decent pace. Bristol Myers Squibb Co. (NYSE:BMY) was doing well until 2012. Lately it’s having as much trouble growing earnings as I have spelling “Myers” with only one “e.”

AstraZeneca’s book value growth is outstanding when you consider its high, but odd dividend distributions. The UK based drug major’s dividend chart looks like a saw blade, but has steadily been trending upwards. Both AstraZeneca plc (ADR) (NYSE:AZN)and Eli Lilly & Co. (NYSE:LLY) are clearing enough net income to pay off their long term debt in less than two years. I was surprised to find not one of these pharmaceutical majors among Berkshire Hathaway’s holdings.

In fact, a look at CNBC’s Berkshire Hathaway Inc. (NYSE:BRK.B) portfolio tracker shows that Buffett has sold off nearly all his holdings in major drugmakers over the past year. Currently, GlaxoSmithKline plc (ADR) (NYSE:GSK), and Johnson & Johnson (NYSE:JNJ) are the only pharmaceutical holdings, and they only account for a few crumbs of the Berkshire Hathaway pie.

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