2009 Cheers and Jeers for Pharma

Yesterday we had lessons from biotech's ups and downs. Today it's pharma's turn to take center stage. Here's a look back at the highs and lows of what happened in 2009.

Consolidation made 2009 go round
A conditional jeer from me on the self-love that pharmaceutical companies exhibited this year. It will be a few years before we know for sure, but past performance shouldn't give investors much confidence that Pfizer's (NYSE: PFE  ) acquisition of Wyeth and Merck's (NYSE: MRK  ) purchase of Schering-Plough will bring investors much value.

The dividend of owning pharma
Pfizer ekes out a cheer for raising its dividend this month. Sure, it cut the dividend in half earlier in the year to support the acquisition of Wyeth, but at least it's headed in the right direction now. And the company sounds like it's planning on continuing the trend.

In fact, dividends are the main reason for investing in pharmaceutical companies at this point. The stock price doesn't have to increase that much to get a decent return considering their substantial dividend yields.

Company

Dividend Yield (TTM
unless otherwise noted)

Pfizer

3.9%*

Merck

4%

Eli Lilly (NYSE: LLY  )

5.4%

Bristol-Myers Squibb (NYSE: BMY  )

4.9%*

GlaxoSmithKline (NYSE: GSK  )

4.4%

Novartis (NYSE: NVS  )

3.2%

Source: Yahoo! Finance. TTM = Trailing 12 months.
*Annualized based on recently announced dividend.

Homer Simpson's favorite deal
Cheers for the industry, which stepped up and negotiated a deal early in the health-care reform process. An early intervention may have saved it from being at the mercy of a taxing Congress and they got some good PR out of it too.

The prescription drug part of Medicare has a gap in coverage where seniors have to pay out of pocket after prescription drug coverage runs out and before catastrophic drug benefits kicks in, the so-called "doughnut hole." The pharmaceutical industry's deal with the White House offers rebates up to 50% for low-income seniors who can't afford to pay for the drugs in the doughnut hole.

The price tag for the rebates was pegged at $80 billion, but health-care reform may cost the industry less than that. Unfortunately seniors sometimes cut back or stop taking their medications when they reach the doughnut hole. The rebates should encourage those seniors who wouldn't have otherwise paid to do so, emerging on the other side of the hole where Medicare will once again pick up the tab.

The industry was going to have to chip in something to decrease the cost of health care anyway. Overall they seem to have negotiated a mighty fine deal.

Not an Effient FDA
Jeers to the Food and Drug Administration on this one. Eli Lilly had to wait over a year after its first PDUFA date to get its blood thinner Effient approved. That's just inexcusable.

It's not just the lost revenue: Eli Lilly is fighting a patent deadline of rival sanofi-aventis and Bristol Myers' Plavix. Once cheap generic versions of Plavix become available, it will become increasingly difficult for Eli Lilly to convince doctors that Effient is the best choice for their patients.

Note to marketing department: The label is there for a reason.
Jeers to Pfizer and Eli Lilly who both had massive settlements with the Department of Justice to the tune of $2.3 billion and $1.4 billion respectively. And a partial jeer for Johnson & Johnson (NYSE: JNJ  ) , which came under investigation by the agency this year.

Doctors are allowed to prescribe drug for conditions that aren't listed on the label, but companies aren't allowed to market drugs for indications that the FDA hasn't approved it for. The fines are supposed to recoup money that Medicare and Medicaid paid for drugs that weren't supposed to be prescribed. Jaded Fools might be wondering if the companies still came out ahead even with the heavy fines. Me too.

Of course the charges stem from marketing that happened years ago, so perhaps Pfizer and Eli Lilly deserve a cheer for bringing the issue to a close as well. Hopefully the companies have cleaned up their acts, and investors won't have to deal with off-label marketing in the future.

Cheers or jeers in 2010?
Making predictions is rather useless, but investors should hope that they see fewer large mergers and more smaller acquisitions and licensing deals next year. Other than that, the industry will follow its normal routine of being valued based on clinical trial results and FDA approvals. Here's hoping there are more cheers than jeers in 2010 for both those categories.

Pfizer is a Motley Fool Inside Value recommendation. Johnson & Johnson is an Income Investor pick. Novartis is a Global Gains selection. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.


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