What it means to be ‘big pharma’ in a $980 billion industry (Part 7 of 10)

(Continued from Part 6)

The advantages of a diversified business

Facing growing competition from generic drugs and products, big pharma companies have diversified beyond drug manufacturing to various business lines within the healthcare segment. For example, in addition to both patented drugs and generic drugs, big pharma is now also present in healthcare products such as medical devices and diagnostics, and consumer products such as eye lenses, baby care products, oral care products, wound care products, skin care products, etcetera.

Major benefits

When proprietary drugs go off patent, the impact on a company’s revenues are huge. When big pharma diversifies its business, it’s able to increase product portfolio and boost market penetration into other segments.

Generally, big pharma companies deal in multiple patented products and maintain a healthy research pipeline to sustain cash flow. With diversification, companies can

• use the same distribution network for multiple products
• create economies of scale for various products—raw materials, packaging materials
• encourage the cross-sale of products with a trusted brand name

Johnson &Johnson (JNJ)

Johnson &Johnson has three business segments. Out of $71.3 billion in total 2013 revenues, here is the breakdown by segment:

• Pharmaceuticals – 39.4%, or $28.1 billion
• Medical Devices and Diagnostics – $28.5 billion
• Consumer Products – $14.7 billion

Merck (MRK)

Merck has four business segments. Out of $44.03 billion in total 2013 revenues, here is the breakdown by segment:

• Pharmaceuticals – 85%, or $37.44 billion
• Consumer Healthcare – $1.89 billion
• Animal Health – $3.37 billion
• Alliances – $1.33 billion

GlaxoSmithKline (GSK)

GSK is involved in pharmaceuticals and consumer healthcare. Its total 2013 revenues were $43.9 billion, of which ~80% came from pharmaceuticals. The remaining 20% came from consumer healthcare products.

Novartis AG (NVS)

NVS is involved in pharmaceuticals, medical equipment, and consumer healthcare. Of its $57.99 billion in total 2014 revenues, pharmaceuticals contributed ~55%, or $31.79 billion.

Johnson & Johnson (JNJ), Merck (MRK), GlaxoSmithKline (GSK), and Novartis (NVS) combined form 28.18% of the Market Vectors Pharmaceutical ETF (PPH). One of the other ETFs in this sector is the SPDR S&P Pharmaceuticals ETF (XPH).

Continue to Part 8

Browse this series on Market Realist:

• Part 1 – What it takes to be called ‘big pharma’
• Part 2 – It’s not easy being big pharma
• Part 3 – Big pharma invests big money in research and development

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