I’m old enough to remember when big pharmaceutical companies were seen as heroes, and even liberals in the media wanted to hug them on national TV.
But that was a long, long time ago.
Way back in … oh … 2021.
Not anymore.
Vermont’s self-described democratic socialist senator, Bernie Sanders, is dragging the CEOs of several of these companies before the cameras on Capitol Hill to name them and shame them for making too much money.
The companies in question are Johnson & Johnson
JNJ,
Bristol-Myers Squibb
BMY,
and Merck
MRK,
They are running a “rigged system … based on ripping off the American people,” Sanders said this week in a report from the Senate Committee on Health, Education, Labor and Pensions, which Sanders chairs. They are “enormously profitable,” the report said, and spend “billions of dollars on stock buybacks and dividends to make their wealthy stockholders even richer.”
Really?
If Bernie Sanders thinks making money as a stockholder in these companies is so easy, he should try it.
As MarketWatch’s Eleanor Laise writes, Sanders’s committee may not be focusing on the most important areas.
Anyone who has tried to take advantage of this apparent “rigged system” through their 401(k) or IRA is counting the cost.
Stock-market data show that over the past one, three, five or 10 years, you were much, much better off in a simple S&P 500 index fund
SPY
than you were in these stocks. Over the past decade, these three “Big Pharma” stocks have, on average, produced just three-fifths of the total returns of the S&P 500
SPX.
The results are similar when you compare them with, say, an equal-weighted version of the S&P 500. These three pharmaceutical stocks, taken together, actually lost investors money in 2023, while stocks more broadly rose.
In other words, if you bought these stocks figuring they were the route to easy riches on account of the companies’ “greed,” a “rigged system” and a business model based on “ripping off the American people,” and you figured that all that money they spent on stock buybacks and dividends would make you “even richer” — well, hard luck.
Of the three, Merck has performed the best, but even this stock has done worse than an S&P 500 index fund over 10 years. Johnson & Johnson and Bristol-Myers Squibb have done worse than the index over almost any recent time frame you care to mention.
Sanders complained that the CEOs are nonetheless paid large sums of money, despite this underperformance. He’s right about that. A look through the companies’ proxy statements shows that Johnson & Johnson CEO Joaquin Duato has been paid $33 million over the past three years. Merck’s Robert Davis has been paid $40 million. And Bristol-Myers Squibb’s Giovanni Caforio has been paid an astonishing $60 million, even though the stock performance has been truly dismal. If you’d put money into Bristol-Myers Squibb’s stock in July 2016, your investment would by now have lost a third of its value in real, inflation-adjusted terms.
That’s after factoring in all those stock buybacks and dividends, allegedly making you “even richer.” Oh, but that’s before taxes.
I emailed Sanders and these companies asking for comment, but I didn’t hear back.
Sanders criticizes the amounts these companies have spent on “stock buybacks, dividends and executive compensation,” as if these things are all one category. If that were so, it would come as a surprise to investors.
As every MarketWatch reader knows, the stockholder doesn’t see a nickel of executive compensation.
And stock buybacks, far from some wacko gimmick, are just a tax-efficient alternative to dividends. It may come as a surprise to noncapitalists that investors need to see a return on their investment. If a company could never pay out dividends or buy back stock, its stock would be worthless. No one would invest in it and the company wouldn’t be able to raise money to do anything.
But this isn’t really about these three companies. I only focused on them because Sanders has. This is an industrywide phenomenon. If the pharmaceutical industry is an easy way for rich stockholders to get even richer, it is doing a very, very good job of hiding that fact from the stockholders.
Simple index funds that invest methodically across the entire pharmaceutical industry have also done much worse than the S&P 500 over one, three, five and 10 years.
Over a decade, the SPDR S&P Pharmaceuticals exchange-traded fund
XPH,
for example, has actually lost value after accounting for inflation.
Some racket.
And then there are the smaller drug-discovery and biotech stocks. If you think those are an easy path to riches either, think again. They, too, have fared much worse than a simple stock-market index fund over a decade or more. Over 10 years, for example, the iShares Biotechnology ETF
IBB
has produced less than one-third of the real, inflation-adjusted returns of the S&P 500.
It lost 20% in 2021 and 26% in 2022, and it made less than 8% in 2023. What a deal!
According to FactSet data, 295 of the 318 U.S. biotech stocks listed on the stock market lost money in their last fiscal year. Nearly the same number, 293, were cash-flow negative.
Of course this isn’t just about investing. We depend on biotech and pharmaceutical companies to come up with new drugs that will cure or prevent diseases, from obesity to cancer to dementia to COVID-19. These lifesaving drugs are unlikely to emerge from committees on Capitol Hill. They will be produced by people with Ph.D.s in real science, not graduate degrees in political science.
But if pharmaceutical and biotech stocks are lousy investments, they will not attract investment dollars. The consequences, in terms of new drugs developed and diseases cured, will then be a matter of simple math and logic.
