Big pharma has lost its way

Unlike biotechs, many of these companies are pouring money into share buybacks -- instead of their long-term pipelines.

By Jim Cramer May 3, 2013 9:25AM
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Droplet Falling from Pipette into Test Tube © Andrew Douglas Radius Images Getty ImagesIf you want to do basic research to develop all new molecules to conquer diseases that can't easily be conquered, chances are you'll have to hire Charles River Labs (CRL) to do the testing. This company can do it faster and more cheaply than anyone else can. It is the acknowledged leader, and no one can dispute that.

But you also can't dispute that Charles River had a weak quarter -- and that a lot of that weakness stemmed from big pharmaceutical companies' unwillingness to spend to develop new molecules that may or may not succeed in conquering a hard-to-beat disease.

On Thursday, when I interviewed Jim Foster, the CEO of Charles River, I realized that I was talking to the flip side of the multi-billion-dollar buybacks and dividend boosts at big pharma. This money they are spending on Wall Street, I believe, would be best spent at Charles River. In this case, they'd be getting the "go -- no go" of new prospects, an incredibly expensive process. This is something that Allergan (AGN) confirmed when it acknowledged how expensive it is to test new drugs on a miss that it had for a new macular degeneration drug.

Instead, what many of these big pharmaceuticals are doing is strictly harvesting what is there, what is known, what is in Phase 3. They're not doing the basic stuff that could or could not produce drugs in 2018.

Contrast that with the other cohort that chooses Charles River -- the biotech companies. While their spending is sometimes inconsistent, it's nothing they would ever scrimp and save on. These companies are risk-takers that are always rolling the dice on something new. They aren't trying to husband resources, fire people, close down facilities or do anything else necessary to make Wall Street's numbers.

Is it any wonder, really, what Wall Street wants? Eli Lilly (LLY), Bristol-Myers (BMY), Pfizer (PFE) and Merck (MRK) are doing well because they are the equivalent of bonds with higher coupons. In addition to those names, the big winners are Gilead (GILD), Celgene (CELG), Biogen (BIIB) and Regeneron (REGN) -- all huge risk-takers with healthy pipelines.

Take Merck, a stock that I like very much for my Action Alerts Plus charitable trust. At the moment, it is probably the most adventurous and bold of the major pharmas. It has 35 compounds in the mix that are hoping for approval some day, with a crackerjack research team put together by Ken Frazier, who is committed to restoring Merck to its old glory.

Yet, at the same time, Frazier is committed to spending $15 billion buying back stock. Shouldn't some, if not a large part, of that money go into research that could be hit or miss?

But that's not how it works. That money goes to buying back stock so as to shrink the shares-outstanding float. In this way, the existing earnings, plus the new approvals, combine to give the company a decent earnings-per-share growth path. That, plus the dividend -- which gives you a hefty and safe 3.7% yield -- satisfies everything you need from a capital-preservation standpoint.

But surely if the Federal Reserve starts tightening and rates go up to compete with Merck, this one would be headed down, no matter how much stock is bought back.

Celgene, Regeneron, Biogen and Biogen Idec, on the other hand, have drugs that could be huge in the outyears. We are paying up for them now in order to get in ahead of the big run in earnings. These names are your capital-appreciation chits.


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Sure, it takes all kinds to make a diversified portfolio. But the simple truth, from the No. 1 drug-testing company in the U.S., is that the majors aren't spending on what they should be spending on -- the long-term pipeline. While they can harvest all the short-term research they want, it is the long-term prospects that ultimately determine the direction of a drug stock. We own these stocks for the elixir of long-term growth, not the bounty of short-term payback.



Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long MRK.   




More from

May 3, 2013 11:42AM

A re-post from another blogger -- worth posting on every msn story.


Jeff, maybe you missed Congress’ latest change to the STOCK Act. Are you sitting down? They just, very quietly, gutted the law that was supposed to stop insider trading… seriously.

On April 11, Congress voted to eliminate the transparency provisions that would have made not just their trades, but the trades of everyone close to elected officials (staffers, aides, lobbyists) available to the general public. You know – the part that mattered. It also delayed until next year the requirement to post financial disclosure forms online. The vote was unanimous. It all went down in a matter of seconds. And Obama signed it into law on April 15.
These people are crooks. They write laws to protect their criminal activity. And so far, they are untouchable.
May 3, 2013 1:13PM
Big Pharma has lost it's way??  They lost it a long time ago. Research cuts into their Pot O' Gold. At times it's tough to believe they really want to cure major diseases because so many pills are being invented to cure fake diseases. Look at the Tee Vee these days. Every other commercial is selling you a pill quickly passed by the FDA with a list of side effects a mile long. Yes, your hair may fall out, you may get cancer, maybe a heart attack, grow hair where you don't want it, impotence, heartburn, thoughts of suicide, etc. etc., but you need this pill folks because you have some disease you didn't know you had. Kaching $$
May 3, 2013 10:52AM
We undoubtedly will  have a tiered health care industry.  How can you incorporate 30 million new users with basically the same number of physicians?  Europe is similar.  I am betting we will have even much less sophisticated available health care for the masses than we have now. My wealthy friends say Switzerland has the best medical professionals in the world because it is an entirely economically motivated treatment system.  Doctors are no different than you are I, they want the best for themselves and their families.  Does anyone really believe you can tell a doctor he has no choice but to treat folks regardless of how he or she feels about it? That is total nonsense.  We will probably have many many more less than doctor types filling in.  Maybe you wouldn't mind a podiatrist doing your heart surgery? For those of us who have health care I see ours being way less responsive to patient needs and much much more bureaucratic.  Remember Liberals hate profits because the profit motive is evil, except of course you are a liberal politician.    Do you think you could force Doctors to treat patients they have no desire to?   Liberals must think they do it as a hobby and aren't interested in the money.  I expect we will abandon many aspects of pharma much like we did the space program.  I think we all can understand guberments inablity to engage in anything with more than a twenty minute time frame.  And the research on these products like Jim says are years in the offing. That time frame just doesn't add up in that we are unable at present to even muster up the political will to construct a new bridge or airport in America today, and we are now going to up the system for another 30 million paients? . When we have a few non politicos getting too much attention; like famous doctors such as Salk etc. the bureaucrats will become jealous and do what they can to make it more difficult for them to prosper.  This is the way of the socialists and anyone thinking we are not now speeding down that path needs a government mandated brain transplant.  .JMHO
May 3, 2013 10:17AM
Something stinks really bad on Wall Street and I'm completely sure it's the Kool Aid. 165,000 jobs? Where are ANY family-sustaining jobs? Payrolls increase? WHERE? The distance between Reality and these data-driven FLAWED reports is widening. NO ONE in America believes we are heading in the correct direction or anyplace but catastrophic failure and yet... every Ben Bernanke gives more of our future away. This looks SOLELY like a drive to make certain numbers so the history books can LIE about the architecture of failure. "It wasn't our plan... look, we hit all the records." Reality- "You KILLED the nation going after those records. That's MURDER. You created an artificial wealth class that can't tie it's own shoes. You destroyed Free Enterprise, Land of the Free, Home of the Brave and condemned us to a Land of Plenty of Kool Aid, not national collective recovery aid." You have to pay us back and that day is coming faster and faster. Where do you go now that you've screwed the whole world? This wasn't a "plan" it has been TERRORISM.
May 3, 2013 1:13PM
Big pharma spends more on lobbying then anyone else and have basically the entire government at every level and the entire health care industry in their pocket.  Anything that is bad for them is good for everyone else.  If they spent the money on lobbying on looking for cures instead of band aids we'd most likely have them.  But hey this system works good too, you know, elected officials, other peoples money = nice dinner and a wiener pull.  What am I missing?
May 3, 2013 10:47AM

Generic Manufactures, have been where the money has been recently..They gear up quicker, formulate and produce...

By the time Big Pharma makes the decision...Generics have taken much of the business.


Drug and Meds prices are all over the Map, across the World..

What U.S. patrons pay $2.00 a pill for, sells for .27 cents in other Countries..Even way cheaper in Canada and Mexico....Why is that ??  Gouging where you can, or  Prescription Plans that have gone wild...Big Pharma once again are their worst enemy; Worst then a "pusher on the street" that gets hooked on his own smack..

Our Drug Cartels work harder on new pipeline and patents, then concentrating on production of a cheaper version of the patents being lost...

They have the facilities, they have the lines, they have the people; Produce billions in advance of Patents dropping...There may be timelines, but most drugs don't expire or go out of date quickly.

May 3, 2013 11:43AM
Cramer the only time I need BIG PHARMA is after another one of your 'expert' columns.
And Mirhaydari's.  Good thing I already have insurance.

May 3, 2013 2:02PM
Btw the stock act was not repealed - some changes were made that aren't good but this smacks of foxy news ....

They only repealed the requirement that financial info be maintained in a searchable public database. 

The rest of the new insider trading law remains. 

They also still have to file the info, but only the President's, the VP's and Congress' info will be posted publicly but not as public searchable database.
May 3, 2013 3:54PM
Grandchilds(2 of 'em,same day).....B'day....YoooHoo, Pizza and we don't have to buy dinner..
May 3, 2013 2:18PM

VOX.....Nice catch on the Bob Hope thing, being born in England, then still becoming one of America's

Greatest Patrons....And yes, a Great American.

Most all of us, are immigrants..


He use to Fight or Box, when he was a youngster, under the name "Packy(something)"?

Think maybe in Northern Ohio, maybe Cleaveland to Toledo and other places ??

But don't remember him ever being "Knighted by the Queen." ??

May 3, 2013 2:10PM

I don't know VOX....Think MSN has already had 3 FaceBook Articles this week...


Ahhhh, what the hell; What's "one more dribble" about FB gonna hurt ??

May 3, 2013 1:44PM


Hey, Mirhaydari just posted his article for today.  Dog pile!



May 3, 2013 12:41PM


Still have to wonder how health care reform will affect all this.  But, it's going to take years for health care reform to completely shake out.  Certainly, it's not going away.



May 3, 2013 11:33AM
Weather true or bogus, Wall Street liked the jobs number, thus the market up almost 180 points and the S&P broke 1600...However, it is still very early and there is always the doubts down here about the veracity of the numbers...This has been the administration that has lied and made up more stuff than any other one in our lifetimes so...Lets hope we can sustain this, if you start seeing us drifting down, time to worry a bit...We will see...More later.
May 3, 2013 2:05PM

Yes, Chris.......Big Pharma and Big Oil....Supply more "hush-up money" to the House and Senate then probably the next 5 biggest doners COMBINED..


And we know little about the Junkets....errr, "Fact Finding" missions.....I call bullshidt !!!

May 3, 2013 2:03PM
What's the odds that cramer will have a FB story next week?   I am saying 50/50 .....
May 3, 2013 8:52PM
  Congrats. Re-Tog! Have one of these myself. First birthday party for my great grand twins sat. Party for another great grand daughter at the arcade next weekend. Great stuff. Had a interesting wed. before last watching my youngest grand son's little league baseball team play against one of my great grandson's team. Have a grandson going to SMU in Dallas on a full scolarship, July 1st, to take a shot at being a Mustang quaterback. Life is interesting for me and Fraline right now. Hope we'll be around to see how it works out. These are the things that make it all worth the effort. Have fun!
May 3, 2013 3:52PM

Packy East...That was it..!!


I always kind of liked Leslie Uggams.....wooohooo !!

May 3, 2013 9:47AM
With Obamacare coming fast, why in the world would any drug company keep spending billions on R&D, since it is becoming very clear they won't see a return on their investment?
May 3, 2013 9:47AM

Gotta keep that stock price up somehow...


Just waiting around for some D&G to kick in....


7.5%, nawwww that can't be right, they are liars...More like 15-17% be the truth.


Market up 150 on the DOW, new records on S&P ; It's Bush's doing, business at the Library.

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