A guy goes into a pharmacist and asks for a painkiller recommendation. When the pharmacist asks him where it hurts, the guy says, "My portfolio! I'm thinking about researching drug stocks."
Okay, that was a bad joke. Pharmacists analyze drug prescriptions, not drug stocks. Alfidi Capital doesn't profess drug expertise, but there are pharmaceutical firms in the San Francisco Bay Area whose financial statements are available for review.
Pharmacyclics (PCYC) makes drugs that treat lymphomas and cancerous tumors. Their ROE this year was a stunningly negative 42%, but this is actually an improvement from their five-year average ROE of negative 81%. PCYC has shown three straight years of improvement in net income, although it is still negative and exceeding total revenue. The firm has over $70mm in current assets on hand as of this past September, which is probably enough to survive another three years assuming they can stabilize their net losses and properly manage their balance sheet.
VIVUS (VVUS) makes therapeutic treatments for obesity, diabetes, and other difficulties. Their current year ROE is slightly worse than PCYC's at negative 43% but shows no comparable improvement. Indeed, VVUS's five-year ROE is over negative 29%. Their annual net losses increased massively by 22x from 2007-2009, apparently due to a 50% drop in gross revenue starting in 2008 and a large increase in R&D spending. VIVUS does deserve credit for holding large amounts of short term investments and keeping its long term debt low.
These two stocks are not the right fit for my own investment philosophy but investors with specific knowledge of drug research may wish to review their product lines and market positions. Small pharmaceutical companies are difficult to analyze without an intimate knowledge of biology, chemistry, and the FDA approval process. The best that other investors and analysts can do is review their financial statements.
Full disclosure: No position in PCYC or VVUS.
