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December 13, 2010
Big Pharma's Lost Stock Market Decade
Talking about Pfizer's stock price the other day let several people to note in the comments that it's not just PFE stock that's had a bad ten years: a lot of other big drug companies have, too, including some (like Lilly) that have very much declined to grow by merging. And it's true, as this chart will show.
This is a sampling of some big US-based pharma companies that have been around during the whole ten-year span. Note that J&J is actually ahead of the index (in red), and it and Abbott are the only two that can claim that distinction. (They're also the only two on the list with a significant medical devices/diagnostics presence - coincidence?)
The pure drug plays have all been pretty rough. Merck, Bristol-Myers Squibb, and Lilly are right down there with Pfizer. What I was trying to get across the other day, though, was not that Pfizer had been awful relative to its peers, but that it's been just as bad. All that merger activity, all that turmoil, has come down to this: same lousy performance as the other big companies. What, from an investing standpoint, has it done for anyone?
Now (as was also pointed out in the comments last week), these charts neglect reinvested dividends, but an S&P index fund's performance would also show some effect from that, too (although not as large as for some individual stocks, for sure). Another big point: we'll never be able to run the control experiment of dialing back the time machine and letting Pharmacia/Upjohn, Warner-Lambert, and Wyeth all stay un-Pfizered. (Not to mention what Pfizer might be were it to have remained un-super-sized). There are too many variables. All we can say is that there's no evidence that any of the big boardroom-level strategies have been superior to any other.
But given the way drug discovery has been going the last ten or fifteen years, it's hard to see anything making such charts look good, mergers or no mergers. That brings up a causality problem, too - it's important to remember that while mergers don't seem to have been doing any favors for drug research, the existing problems of drug research are what have led to many mergers. What was it that David Foster Wallace once said - that the definition of a harmful addiction is something that presents itself as the cure for the problems it's causing?
Update: in case you're wondering if this is just an effect of starting ten years ago (when the market was much livelier), you can use that Google Finance link to move the starting point back. From what I can see, you have to go back to 1994 or 1995 to find a point at which most of the drug stocks would have outperformed the S&P 500 (and as that last-ten-year chart shows, all of that happens early). Merck lags for a long time, and Bristol-Myers Squibb and Lilly still aren't above the line even if you start in the mid-1980s.
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