Shareholders of both Merck and Pfizer have much bigger problems than just selling bad drugs.
- Dec 24, 2004
YOU MAY NEED TO SIT DOWN FOR THIS ONE.
It seems that the bigwigs at both Merck (NYSE: MRK) and Pfizer
(NYSE: PFE) have been discussing ways to get past the PR nightmare
of selling painkillers that cause heart attacks to sick people.
My own sources (read: fake people) tell me that in one meeting, the
Mr. Magoo-like Chairman and CEO of Merck Raymond Gilmartin,
proposed offering a free bottle of PEPCID for anybody who
purchased 100 shares of his stock.
The heartburn medicine.
Ladies and Gentlemen, I think it’s about time for an
Not the kind of intervention where we sit down with a DRUG USER
and tell him he/she needs help.
The kind where we sit down the DRUG DEALER and tell them that
THEY NEED HELP.
Yeah, this is a new one for me too folks.
Here’s why an intervention is needed:
The problems that pure-play drug companies in BigPharma are facing
right now have their roots in mismanagement dating back close
to ten years.
Now, don’t get me wrong.
I’m not saying that they’re stocks haven’t performed well during the
Far from it.
What I am saying is that their stocks have performed too well.
So well in fact that while the bigwigs were fantasizing about the
new toasters they recieve from depositing their stock-option checks
at the bank, the forgot the most important rule to selling drugs –
MAKING NEW DRUGS!
Here’s a sobering statistic for you:
In 1996 the FDA approved 53 new drugs.
In 2003 that number dropped to 21.
During the same time, annual R & D spending for bigpharma nearly
doubled to $33 Billion per year.
$33 Billion dollars.
That means that in 1996 the drug companies spent, on average,
$320 Million to introduce a new drug from start to finish.
In 2003 that number ballooned to $1.5 Billion per drug.
Now I admit, I am not a drug-stock analyst.
Not by a long shot.
As a matter of fact, and let me make this very plain – I don’t
think I’ve ever even owned a drug stock.
And while I do fancy myself somewhat of a business analyst
(at least that’s what I say to meet women), I’ve never quite
been able to get my mind around the science of making the
kind of products drug companies make.
Sure, I’ve taken an occasional antibiotic when sick.
Heck, a friend even got me to take a Vicodin at a summer party
at the Hamptons many years ago (he was my last intervention).
But ever since I read a statistic some years ago that said over
90 percent of all drugs never make it past the FDA, I’ve never
been comfortable with the odds.
This is not to say that they haven’t made investors a lot of
money – I personally know one or two people who are a sliver
away from the Forbes 400 list – but it’s never been my bag.
But I do understand how to invest.
And the first rule of investing is to make more money than you spend.
That rule applies to you whether you’re an investor spending IRA
money or My-Favorite-GilMARTIAN running Merck.
At that, ladies and gentlemen, means that the problem, as always,
starts at the top.
But the problem hasn’t been universal.
Companies like Johnson and Johnson (SYM: JNJ), probably seeing that time
was needed for the science to catch up to the investment, continued
to diversify into consumer health products and medical devices.
But much of the rest of them have been in denial.
If that wasn’t the case, then why haven’t shareholders of these
companies held these CEO’s accountable for research inefficiency?
(Michael Eisner could only wish for breaks like that.)
It’s because of the money.
Yes, that’s it.
Shareholders have made so much money in the past several years that they
forgot they needed to take a long hard look at the product pipeline.
But it’s not just investors who drank too much of the fruit punch
at this party.
It’s the leadership.
And they’re the ones that should have been pulling away the bowl
instead of spiking it.
But that didn’t happen.
Far from it.
And while I’m sure most bigpharma stocks are relatively cheap trading
now at a soft 15 P/E, I would tread carefully.
Just because their stocks may have limited downside doesn’t mean that
they have upside.
Ultimately, the only thing that makes a stock rise are earnings
or the prospect of earnings to come.
And without products in the pipeline many investors may be left
Dont forget: you are what you read.