While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself. With that in mind, this article will take a brief look at the best companies of the pharmaceuticals industry, selecting the most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 550 companies reviewed by ModernGraham, 23 were identified as being closely related to the pharmaceuticals industry.  Of those, only one is suitable for the Defensive Investor, seven are suitable for the Enterprising Investor, and the remaining fifteen are considered speculative at this time. Excluding any extreme outliers, the average company was rated as being priced at 160.49% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 41.26. The industry as a whole, therefore would appear to be overvalued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

Pfizer Inc. (PFE)

Pfizer performs well in the ModernGraham model and is suitable for Enterprising Investors. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, along with the poor PB ratio, while the Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.18 in 2011 to an estimated $2.03 for 2015. This is a strong level of growth and is well above the market’s implied estimate of only 4.49% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged nearly 14.4% annually, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time. (See the full valuation)

Biogen Inc. (BIIB)

Biogen IDEC Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the lack of dividends, along with the high PEmg and PB ratios. The Enterprising Investor is only initially concerned by the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.89 in 2011 to an estimated $11.36 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 9.66% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

The Good

The following companies have been rated as fairly valued and suitable for either the Defensive Investor or the Enterprising Investor:

Amgen Inc. (AMGN)

Amgen performs well in the ModernGraham model and is suitable for Enterprising Investors. The Defensive Investor is concerned with the low current ratio, along with the poor PEmg and PB ratios, while the Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $4.22 in 2011 to an estimated $7.20 for 2015. This is a strong level of growth and supports the market’s implied estimate of 7.54% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged nearly 14.1% annually, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value within a margin of safety relative to the current price, indicating the company is fairly valued at the present time.  (See the full valuation)

Zoetis Inc. (ZTS)

Zoetis Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the short history as a stand-alone company, and the high PEmg and PB ratios. The Enterprising Investor is only initially concerned by the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.18 in 2011 to an estimated $1.20 for 2015. This level of demonstrated earnings growth supports the market’s implied estimate of 16.04% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.  (See the full valuation)

The Full List

For the investor type, a “D” indicates the company is suitable for the Defensive Investor, an “E” indicates the company is suitable for the Enterprising Investor, and an “S” indicates the company is considered speculative at this time.