Hands down, one of the greatest movies of all time is “The Godfather” based on the book by Mario Puzo. Now, if you haven’t seen this movie yet – go get it tonight! Find it on Netflix, order it online, RedBox it… I don’t care how you get it, but watch this movie.
Its all-star cast includes Marlon Brando and Al Pacino.
The move is riveting… and it tells the story of the Corleone crime family in the 1940s and 1950s. How good is the movie? It has an Academy Award for Best Picture, Best Actor, and Best Adapted Screenplay. And the American Film Institute rates it number two on the list of the 100 greatest movies.
I have the movie on DVD and watch it from time to time.
In it, there’s a scene where Michael Corleone, played by Al Pacino is talking with his girlfriend (Diane Keaton). He’s explaining how his father – the Godfather – does business. He utters a bone chilling line…
“He made him an offer he couldn’t refuse.”
You quickly learn when the Godfather makes an offer you can’t refuse, it involves a gun being held to someone’s head. While the ruthlessness of the mobster way can’t be disguised, often we see the same situation in real life.
Although, it might not involve a gun.
Many people don’t realize how often they’re made an offer they can’t refuse. If you want to know what I mean, simply get cancer… then see how expensive the treatments are.
Every once in a while, in real life, you’re faced with a decision. A decision where common economics goes out the window.
Take the Cancer example for a moment.
If you have cancer, how hard will you work to find a solution?
If you have a terminal illness and the treatment costs hundreds of thousands of dollars, how hard do you work to buy that drug?
And if you need a lifesaving operation that’s not covered by insurance… you go out and find the money…
Because if you don’t – Your only alternative option is death.
Now, you might not traditionally think of it in terms like this… and I know it sounds a little crass… but every day the medical industry makes a life or death decision for many of their customers.
They make them an offer they can’t refuse.
Proof is found no further than the drug industry. Think about how many different medicines you take every day. The older you get the more they seem to multiply.
And while not every medical problem is life or death, often the solution is seen in black and white. Are you in pain? Then take this drug. Have a problem with your blood pressure? Here are some drugs. Can’t get it up in the bedroom? Swallow a few pills.
It’s not life and death, but to the patients, their troubles can be instantly solved.
Consider all of the drugs doctors are prescribing every day. According to the research group IMS Health, the most commonly prescribed drugs were used to fight:
- Pain
- High Cholesterol
- High Blood Pressure
- Thyroid Gland Function
- Acid Reflux
- Bacterial Infections
- Diabetes
Just an observation, but notice that none of these commonly prescribed drugs is used to treat cancer or a terminal illness… just an observation!
Now every one of the problems listed above can be fixed (or at least made bearable) by prescribing more and more drugs. And, as a result, the drug industry is reaching record levels.
In 2010 the money spent on medications topped $307.4 billion!
Not only is the volume of medications increasing, but the cost of medication is going up too. IMS reports “Increasing levels of off-invoice discounts and rebates negotiated by payers and intermediaries accompanied these increases, resulting in net growth from pricing of $12.1 billion, or 4.2 percent of total spending.”
In other words, the cost of drugs is going up.
And you and I have to foot the bill!
Now here’s where the research gets really scary. According to IMS, the top therapy class in dollars spent was oncology. In other words, the most expensive therapy, at $22.3 billion, was for CANCER TREATMENT. So the people who need the drugs the most were forking over the most money for a cure.
Now that’s an offer you can’t refuse.
I can see the fire brewing in your belly. You might see the drug companies as greedy bastards… or humane doctors saving lives. Either way, you can’t dispute the numbers. Selling drugs, especially in the United States, is a huge industry.
And that’s what got me looking at the drug companies a little closer.
Depending on recent stock prices, merger activity, and the direction the wind is blowing, five of the most widely recognized drug companies include, Johnson & Johnson (JNJ), Pfizer (PFE), GlaxoSmithKline (GSK), Novartis (NVS), and Sanofi-Aventis (SNY).
Where the real money’s found…
A close examination of these companies shows something astounding… their operating margins are off the charts. According to Reuters, the five year average operating margin for the S&P 500 is 14.7%
Just look at what these drug companies are making…
- Johnson & Johnson has a 26% operating margin.
- Pfizer posts a 26% operating margin
- GlaxoSmithKline topped the group with a 32% operating margin
- Novartis announced a 23% operating margin, and
- Sanofi-Aventis reported an operating margin of 24%
These are huge companies with billions in sales, and the drug companies are knocking results out of the park! Their operating margins are between 56% and 117% greater than the S&P 500 average.
Think about that for a moment.
Not only are drug companies charging more for their products, they’re able to generate big profits off them.
What really has my attention is the profits.
Companies throwing off excess profits are a wonderful thing… especially when you own those stocks. Remember the more cash a company generates, the more valuable they become. And of course the more valuable a company is, the better their stock should perform.
While I’m not a big fan of profiting from other people’s pain and suffering, the good part about the drug industry is the hundreds of millions of lives it’s saved over the years. One time death sentences can be reversed. Diseases that would cripple a child are now curable…
And amazingly, the drug companies can profit from these positive activities.
If you’re looking for a solid area to invest some money, look no further than the drug industry. You’ll uncover a lot of interesting companies doing amazing things… and making lots of money too. I think it’s a great place to invest… and that’s an offer you can’t refuse!