I’m old enough to remember when big pharma was considered heroes and even liberals in the media wanted to hug them on national television.

But that was a long, long time ago.

A long time ago… oh… 2021.

No longer.

Vermont’s self-proclaimed 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, -1.51% , Bristol-Myers Squibb BMY, -0.36% and Merck MRK, -1.10% . They are running a “rigged system … based on ripping off the American people,” Sanders said this week in a report by the Senate Health, Education, Labor and Pensions Committee, which Sanders chairs. They are “enormously profitable,” the report says, and “spend billions of dollars on stock buybacks and dividends to make their wealthy shareholders even richer.”

Really?

If Bernie Sanders thinks it’s that easy to make money as a shareholder in these companies, he should try it.

As MarketWatch’s Eleanor Laise writes, Sanders’ committee may not be focusing on key areas.

Anyone who has tried to take advantage of this seemingly “rigged scheme” through their 401(k) or IRA will face the costs.

Stock market data shows that over the last one, three, five, or 10 years, you’ve been much, much better off with a simple S&P 500 index fund SPY than with these stocks. Over the last decade, these three Big Pharma stocks have, on average, generated just three-fifths of the total return of the S&P 500 SPX.

The results are similar when compared to, for example, an equal-weighted version of the S&P 500. These three pharmaceutical stocks combined actually lost investors money in 2023, while stocks as a whole rose.

In other words, if you were to buy these stocks based on the assumption that they would be sold because of “corporate greed,” a “rigged system,” and a business model based on “ripping off the American people,” the path to easy If you’re rich, then you thought that all the money you spent on stock buybacks and dividends would make you “even richer” – well, tough luck.

Of the three, Merck performed best, but even that stock has underperformed an S&P 500 index fund over 10 years. Johnson & Johnson and Bristol-Myers Squibb have underperformed the index in almost every period over the most recent periods you care to mention.

Sanders complained that despite this poor performance, CEOs are still receiving large amounts of money. He is right. A look at the companies’ proxy statements shows that Joaquin Duato, CEO of Johnson & Johnson, received $33 million over the last three years. Merck’s Robert Davis received $40 million. And Bristol-Myers Squibb’s Giovanni Caforio received a staggering $60 million, even though the share price performance was truly dismal. If you had put money into Bristol-Myers Squibb stock in July 2016, your investment would have lost a third of its value in real terms and adjusted for inflation by now.

That’s considering all those stock buybacks and dividends that supposedly make you “even richer.” Oh, but that’s before taxes.

I emailed Sanders and these companies seeking comment but received no response.

Sanders criticizes the amounts these companies have spent on “stock buybacks, dividends and executive compensation,” as if these things were all one category. If so, it would be a surprise to investors.

As every MarketWatch reader knows, the shareholder doesn’t see a dime in executive compensation.

And far from being a crazy gimmick, share buybacks are simply a tax-efficient alternative to dividends. It may be surprising to non-capitalists that investors need to earn a return on their investment. If a company could never pay dividends or buy back shares, its shares would be worthless. No one would invest in it and the company wouldn’t be able to raise money for anything.

But this isn’t really about these three companies. I only focused on them because Sanders did. This is an industry-wide phenomenon. If the pharmaceutical industry is an easy way for rich shareholders to get richer, it does a very, very good job of hiding that fact from shareholders.

Even simple index funds that systematically invest in the entire pharmaceutical industry have performed significantly worse than the S&P 500 over one, three, five and ten years.

For example, over a decade, the SPDR S&P Pharmaceuticals exchange-traded fund XPH has actually lost value, taking inflation into account.

Some noise.

And then there are the smaller pharmaceutical and biotech stocks. If you think this is also an easy path to wealth, think again. They also did significantly worse than a simple stock index fund for a decade or more. For example, over ten years, the iShares Biotechnology ETF IBB has generated less than a third of the real, inflation-adjusted returns of the S&P 500.

It lost 20% in 2021 and 26% in 2022 and accounted for 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 the last fiscal year. Almost the same number, 293, had negative cash flow.

Of course, this isn’t just about investing. We depend on biotech and pharmaceutical companies to develop new medicines that cure or prevent diseases, from obesity to cancer to dementia to COVID-19. These life-saving drugs are unlikely to emerge from committees on Capitol Hill. They are created by people with doctorates in real science, not graduate degrees in political science.

But if pharmaceutical and biotech stocks are bad investments, they won’t attract investment money. The consequences in terms of developing new drugs and curing diseases will then be a matter of simple mathematics and logic.

Source : www.marketwatch.com

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