Drug Companies: A Powerhouse of Profits

by The Investment U Research Team

A couple of interesting news items came out in the past few days. One, a research report showing how expensive treatment is for childhood mental issues. It also showed that in 2006 over 13 million children were treated for asthma at a cost of $8 billion.

The other a study that finds more Americans than ever are taking some sort of prescription for mental illness – 73% more than in 1996.

What’s interesting, apart from the fact that we seem to be overmedicating as a society, is that the numbers of patients and the costs of treatments spell hundreds of billions in profits for healthcare and drug makers.

Taking a look at the eleven largest, we find that their market caps total almost $900 billion. That’s a trillion dollars in market value within a handful of companies.

Merck and Co. (NYSE: MRK), Schering-Plough (NYSE: SGP), GlaxoSmithKline ADR (NYSE: GSK), Bristol Myers Squibb (NYSE: BMY) Sanofi-Aventis ADR (NYSE: SNY), AstraZeneca ADR (NYSE: AZN), Johnson & Johnson (NYSE: JNJ), Roche Holding Ltd ADR (OTC: RHHBY) Novartis AG ADR (NYSE: NVS), Eli Lilly & Co (NYSE: LLY) and Wyeth (NYSE: WYE) represent a powerhouse of pharmaceuticals and drug development.

And while we’ve talked before about the potential for mega-mergers, looking at the size of the playing field one discovers that for the most part, these companies are relatively the same size.

The question is whether by merging, and growing larger they will be able to cut redundant overhead for these transactions to make sense. Is there a market cap size where these firms are able to run most effectively, most efficiently, and most profitably?

Companies mentioned in this article: MRK, SGP, GSK, BMY, SNY, AZN, JNJ, RHHBY, LLY and WYE

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