Drugmakers' Differences: Analyst's Toolkit

BOSTON (TheStreet) -- Shares of drugmakers Sanofi-Aventis(SNY Quote) and GlaxoSmithKline(GSK Quote) have climbed faster than their American competitors this year.

Sanofi has risen 26%, assuming reinvested dividends, and GlaxoSmithKline has increased 18%, outpacing Merck(MRK Quote) and Pfizer(PFE Quote), which have advanced 16% and 6.5%, respectively.

Pipelines and patent lives are the ways to pick drugmakers, but financial ratios can help shed light on the differences. Consider these factors:

Price-to-Earnings Ratio

Sanofi: 7.19 GlaxoSmithKline: 10.4

Versus an industry average of 17.3, both of these stocks appear attractive, but Sanofi has an edge due to its lower P/E ratio. Because the companies operate outside the U.S., neither reports in a similar fashion to American companies, which makes comparisons difficult. Anyway, analysts project Sanofi's earnings will climb to $4.92 a share in 2010, an increase of 3.4%. For GlaxoSmithKline, it's a 2.9% gain.

PEG Ratio

Sanofi: 2.27 GlaxoSmithKline: 2.32

In terms of the PEG ratio, both stocks look to be overvalued. Growth estimates for the pharmaceutical industry are unimpressive across the board due to a variety of reasons, such as the uncertainty in new drug success or discovery, and the future state of health care. Those factors drive the PEG ratios for the stocks beyond the traditionally accepted mark of 1 for fairly valued investments. While this gauge is essentially a draw for these companies, the comparison with Pfizer shows a stark contrast. At 3.4, Pfizer's PEG ratio suggests a big over-valuation. Merck's PEG of 1.92 is in line with that of Sanofi and GlaxoSmithKline.