Eli Lilly & Co. (LLY), GlaxoSmithKline plc (ADR) (GSK), And Why You Don’t Have to Run a Cartel to Make Big Profits in Drugs

Good businesses, highly valued

Investing in stocks is about more than just finding good businesses–that is only half of the equation. The price at which we buy an investment is instrumental in determining our ultimate profit.

Eli Lilly & Co. (NYSE:LLY) and Pfizer Inc. (NYSE:PFE) are excellent examples of good businesses that are well run but simply priced too high at the current time to justify investment with a realistic expectation of double digit returns over an extended period of time. Both carry high payout ratios to support the existing dividends, and the projected earnings growths rates for both could best be described as modest.

These are both large, stable businesses but investors in either should be willing to accept total returns between 5% and 8% a year over the long term. While those are not horrible numbers when compared to government bonds or interest on savings, it is not what I am willing to accept when taking on the risk of stocks.

Roll the dice on a one-trick pony

Those wishing to take on a larger risk with an inexpensive drug stock with only one product might wish to take a close look at Questcor Pharmaceuticals Inc (NASDAQ:QCOR). It’s one product is H.P. Acthar gel. The stock was hammered last fall due to concerns surrounding insurance reimbursements for off-label uses. Those concerns now appear to have been overblown, and a more detailed discussion of the business can be found here. Questcor Pharmaceuticals Inc (NASDAQ:QCOR) is scheduled to report earnings on April 30, and I expect the stock to move higher on strong results.

Final Foolish thoughts

Investors seeking relative safety and out-sized performance should consider investing in Abbott Laboratories (NYSE:ABT) and GlaxoSmithKline plc (ADR) (NYSE:GSK). Those with a gambler’s soul may wish to consider a position in Questcor Pharmaceuticals Inc (NASDAQ:QCOR) in front of the next earnings report.

The article You Don’t Have to Run a Cartel to Make Big Profits in Drugs originally appeared on Fool.com.

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