(List compiled by Alexander Crawford)
Pharmaceutical companies seem to be at odds these days about their spending. In a recent survey from KPMG of 100 senior execs of the US pharmaceutical industry, 58% said their top concern was patent expirations of key therapies and generic competition. But companies are reacting differently to this issue.
Merck & Co. (MRK) CEO Kenneth Frazier recently had an interview with the Wall Street Journal about his decision to increase research and development (R&D) spending for 2011. “Science and innovation are in the DNA of the company,” Frazier said. “The science will lead us to another big breakthrough.”
Frazier expects to increase research spending to $8.4 billion in 2011, compared to $8.1 billion in 2010. This is at a time when Pfizer (PFE) is shying away from R&D spending. Pfizer plans to use $6.5 billion to $7 billion in 2012 for research, down from about $9.3 billion last year.
This November, Pfizer will lose patent-status for its cholesterol drug Lipitor, which is currently the best selling drug in the world.
Pfizer has said it will put more money into share repurchases, and investors seem much happier with Pfizer’s decision than with Merck’s move to increase R&D. Merck’s stock has performed at near break-even for 2011, while Pfizer’s stock is up almost 15%, as of July 18.
Former research chief of Pfizer (from 2004 to 2007) John LaMattina warned about Pfizer’s new move in an interview with Reuters earlier this month. Citing that $6.5 to $7 billion in research spending in 2012 is 10-11% of estimated revenues. LaMattina said, “this industry historically has spent anywhere from 15 to 20 per cent of top-line sales in R&D…It’s their lifeblood. If you don’t have new products you don’t have a business anymore.”
“In the short term, I guess that’s OK in terms of delivering for shareholders,” LaMattina said. “But four, five, 10 years out, I’m not sure that is going to be a very good position to be in.”
LaMattina pointed in contrast to Eli Lilly and Co. (LLY), who has recently vowed to protect their R&D budget.
“As a company that is focused on innovation and seeking new treatments and cures, it’s important that we maintain a steady approach and a consistent approach in investing in R&D, and I’m confident it will pay off,” Lilly CEO John Lechleiter told Reuters.
What do you think these companies’ investors want? Will Pfizer’s plan of satisfying investors continue to pay off, or are Merck and Lilly making better long-term decisions?
Here is some interesting data on the three companies:
analyse These Ideas (Tools Will Open In A New Window)
1. Merck & Co. Inc. (MRK): Drug Manufacturers Industry. Market cap of $109.54B. Offers a good dividend, and appears to have good liquidity to back it up–dividend yield at 4.28%, current ratio at 1.98, and quick ratio at 1.59. The stock has gained 3.53% over the last year.
2. Pfizer Inc. (PFE): Drug Manufacturers Industry. Market cap of $155.18B. Offers a good dividend, and appears to have good liquidity to back it up–dividend yield at 4.07%, current ratio at 2., and quick ratio at 1.71. The stock has gained 39% over the last year.
3. Eli Lilly & Co. (LLY): Drug Manufacturers Industry. Market cap of $44.05B. Offers a good dividend, and appears to have good liquidity to back it up–dividend yield at 5.15%, current ratio at 2.01, and quick ratio at 1.64. The stock has gained 14.71% over the last year.
Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.