Big pharma has lost its way
Unlike biotechs, many of these companies are pouring money into share buybacks -- instead of their long-term pipelines.
If 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.
The Street.com is granting free access to all our premium investing newsletters this weekend only. Get your pass to our open-house here.
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 TheStreet.com
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.
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.
And Mirhaydari's. Good thing I already have insurance.
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.
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." ??
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 ??
Hey, Mirhaydari just posted his article for today. Dog pile!
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.
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 !!!
Packy East...That was it..!!
I always kind of liked Leslie Uggams.....wooohooo !!
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.
Copyright © 2014 Microsoft. All rights reserved.
The company plans to close stores and lay off employees, and says it needs to make some deeper changes.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.