Confused by Pharma Stocks’ Hefty Dividends, Weak Drug Pipeline? Below a Debate That Informs

Last month, the BMJ (British Medical Journal) published a controversial paper that maintained that the “widely touted innovation crisis in pharmaceuticals is a myth.” Rather, the authors contended that the “real innovation crisis” can be traced to R&D that produces “mostly minor variations” on existing drugs and incentives that reward drugmakers for such efforts. Meanwhile, they charged that many of the newer drugs caused an “epidemic” of serious side effects that added to healthcare costs.

The analysis actually continued a long-running debate over the pharma pipeline and its price tag, especially given that one of the two authors – Donald Light, a professor in the Department of Psychiatry at the University of Medicine and Dentistry of New Jersey – has previously published work that contends the true cost of producing a new drug is closer to $43 million, and not the $1 billion-plus figure that the pharmaceutical industry has cited.

The weak drug pipeline, whatever its causes, is behind low-ish drug stock PE ratios and high dividend yields – take a look below at Eli Lilly (LLY), GlaxoSmithKline (GSK), AstraZeneca (AZN) and Sanofi (SNY).

LLY PE Ratio Chart

LLY PE Ratio data by YCharts

LLY Dividend Yield Chart

LLY Dividend Yield data by YCharts

The BMJ paper (see here) sparked some supportive statements, but also a host of sharp critiques. One came from scientist Derek Lowe, who writes the popular In The Pipeline blog that is widely followed by scientists and academics. He took Light and his co-author Joel Lexchin, a York University School of Health Policy and Management professor, to task for portraying the issue as a conspiracy.

R&D, he wrote, “is not the profitable side of the business. Far from it. We are black holes of finance: huge sums of money spiral in beyond our event horizons, emitting piteous cries and futile streams of braking radiation, and are never seen again. The point is, these are totally different parts of the company, doing totally different things. Complaining that the marketing budget is bigger than the R&D budget is like complaining that a car’s passenger compartment is bigger than its gas tank, or that a ship’s sail is bigger than its rudder” (read more here).

Ever since, Light has been responding in turn, as he did on In The Pipeline (read here), and again today in the Harvard Business Review blog in which he writes that “innovative and breakthrough” drugs “must be priced high to recover research costs that have become ‘unsustainable. However, revenues have increased six times more than their increased costs for research — hardly ‘unsustainable.’ This handsome return comes from the hidden business model that generates billions in costs for employers and employees” (read the rest here).

To read the remainder of this article, please go to Pharmalot.

Ed Silverman is the editor of Pharmalot and a contributor toYCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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