Intel Expands Its Pharmaceutical R&D

Intel Corporation INTC investors understand that R&D spending means more growth returns than they pay for. Intel’s Pharmaceutical R&D is capitalizing on research. Intel announced a deal last month to make "field-programmable gate arrays" for Altera (ALTR). Field-programmable gate arrays is an integrated circuit designed to be configured by a customer or a designer after manufacturing—hence "field-programmable". Intel and Altera will be collaborating to transition into developing high-end high performance next-generation of  Intel’s (FPGA) chips.

Three fourths of Intel’s combined R&D and capital investment is in the United States. When Including R&D investment and capital expenditures, Intel invested $82 billion in U.S.based innovation over the last 10 years. In 2011 alone, these investments totaled over $13 billion. Intel has a market cap of $104.42 billion. Shares are up 5.5 percent year to date. The stock's dividend yield is at 4.3 percent. The company has a P/E ratio of 9.9, which is below the S&P 500 P/E ratio of 17.7.

Intel’s Competition

Actavis, Inc. ACT is now the world’s third largest generic pharmaceutical company, with anticipated pro

forma combined 2012 revenues in excess of $8 billion. The company 2012 earnings on the higher

end of its previously issued guidance range of $5.85 to $5.95, which is up 25 percent from 2011. 2012 revenues are expected to increase 29% percent to about $5.9 billion. Actavis Pharma, the company’s global generics business, is expected to post revenues of $6.3 billion to $6.5 billion in 2013. Actavis is the third largest player in the global generics market.

Actavis says it will close its Maltese R&D unit at a cost of 60 jobs. The R&D closure came within a week of another unit being shuttered by Actavis. A US R&D unit was closed also last year. Actavis seeks to diversify by using brand-name products to fuel growth. Actavis will cut about $300 million in costs over three years and closing plants.

The risk share structures are affected. Actavis can use different strategies for 2013, depending on its pipeline, capacity, financing, or risk tolerance. Closures due to financial instability are prone to more late-stage product failures.

Glaxo-SmithKline GSK The stock has ranged in price between $48.15 to $48.48. Glaxo-SmithKline has a market cap of $128.9 billion. The company P/E ratio is 14.4. Shares are up 11.6% percent year to date. Glaxo-SmithKline is making efforts to ensure financial accountability for the company’s R&D outlays. R&D expenditures are beginning to embrace a new approach. Intel’s innovation and global presence is a threat to Glaxo-SmithKline. Pressure with success in R&D is forcing CEOs to make more and quicker decisions on R&D propositions than ever before.

Investment Outlook

Investors will worry that pharmaceutical companies won’t be completely forthright about the risks of their programs. To build trust, management teams must therefore support thorough due diligence, just as they would expect it themselves. They’ll also have to explain their motives for wanting to share particular risks and to share in fair value.

Investors should pay attention to low price-to-R&D ratios with modest price/earnings ratios. Altera earns the largest share of its revenues from FPGA products. The association with Intel is expected to drive long term results. The company’s revenue growth is led by its new products.  Intel-powered 14nm FPGA product suites is sure to show return of revenue for the company. Intel is strong in financial position, attractive valuation levels, expanding profit margins and notable return on equity. Intel share prices are now trading 17% above that low price at $22.36 per share. .