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A PEG ratio cannot be used alone but is a very powerful tool when integrated with the basics (price, volume and chart reading). You must enjoy crunching numbers and have a calculator handy to estimate your own PEG r

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

atio. Access to quality statistical information from the web such as past earnings and future earning estimates is essential to calculate this fundamental indicator. A variety of websites produce a PEG ratio but I

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

ave not found one site that has a reliable PEG ratio that I can use for my own research, so I calculate it myself, ensuring accuracy with the final number.

I am going to use the definition from investopedia.com as i

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

makes complete sense and doesn’t get too confusing (below the definition is further explanation and a current real time example, using Apple Computer).:

The PEG Ratio: “The PEG ratio compares a stock

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

's price/earnings ("P/E") ratio to its expected EPS growth rate. If the PEG ratio is equal to one, it means that the market is pricing the stock to fully reflect the stock's EPS growth. This is "normal" in theory bec

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

use, in a rational and efficient market, the P/E is supposed to reflect a stock's future earnings growth.

If the PEG ratio is greater than one, it indicates that the stock is possibly overvalued or that the market e

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

pects future EPS growth to be greater than what is currently in the Street consensus number. Growth stocks typically have a PEG ratio greater than one because investors are willing to pay more for a stock that is exp

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

ected to grow rapidly (otherwise known as "growth at any price"). It could also be that the earnings forecasts have been lowered while the stock price remains relatively stable for other reasons.

If the PEG ratio is

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

less than one, it is a sign of a possibly undervalued stock or that the market does not expect the company to achieve the earnings growth that is reflected in the Street estimates. Value stocks usually have a PEG rat

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

o less than one because the stock's earnings expectations have risen and the market has not yet recognized the growth potential. On the other hand, it could also indicate that earnings expectations have fallen faster

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

than the Street could issue new forecasts.” - provided by www.Investopedia.com

PEG Ratio Example: Using Apple Computer Inc., I will demonstrate how to calculate the PEG ratio without relying o

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

n other websites.

First, you will need to gather the past earnings numbers; going back at least 2 years and going forward two years. (All data is from Thursday, June 23, 2005)

AAPL:
2003: 0.09
2004: 0.36<

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

r> 2005: 1.31 (E)
2006: 1.52 (E)

Now we need to calculate the growth from year to year.
Subtract the earnings of 2004 by 2003 and then divide by 2003.
Repeat the process to determine the growth rate

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

or the following years:

2004: (0.36-0.09)/0.09 x 100 = 300% growth rate

2005: (1.31-0.36)/0.36 x 100 = 264% growth rate

2006: (1.52-1.31)/1.31 x 100 = 16% growth rate

Now, take the current price (we will use the

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

close from Thursday, June 23, 2005: $38.89) and divide it by 2004 earnings and then by the 2004 growth rate:

2004: 38.89/ 0.36 / 300 = .36 PEG Ratio
2005: 38.89/ 1.31 / 264 = .11 PEG Ratio
2006: 38.89/ 1.5

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

/ 16 = 1.59 PEG Ratio

Using the definition from above, Investopedia states that a stock is evenly valued at a PEG ratio of 1 in a rational and efficient market. Please note that the stock market is not very ration

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

l or efficient so we only use this number as a secondary indicator and tool, after our fundamental and technical analysis is complete. Apple’s PEG Ratio of 0.11 for 2005 was discounted into the price when these esti

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

mates first hit the street, giving us the big run-up late last year. Going forward, the stock’s earning potential looks to slow considerably and the PEG ratio clearly shows us the tremendous jump in numbers from 200

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

to 2006. A PEG ratio of 1.59 for 2006 is not the best rating going forward but still under the red flag ratio of 2.00.

Finally, once you determine the PEG ratio of the stock you are looking to buy, take the time t

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

calculate the PEG ratio for the “sister stocks” in the industry group to see if they have higher or lower PEG ratios. Keep in mind, PEG ratios don’t work for companies with negative or non-existent earnings numbers

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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