Many Americans have seen their bank accounts dwindle as the recession has forced them to dip into savings to make ends meet. But the opposite is true with several leading members of Big Pharma. They’re piling up cash so fast that even the federal government would have a hard time spending it all.
Flush with cash is Johnson & Johnson (NYSE:JNJ), with about $28 billion in its coffers. Pfizer’s (NYSE:PFE) piggy bank is overflowing with $25 billion. Merck (NYSE:MRK) has stashed away an additional $1 billion this year, swelling the company’s pocketbook to about $11 billion.
We’re all familiar with the expression “cash is king,” but does that mean these three drug makers are great investment opportunities? Not necessarily.
There’s certainly nothing wrong with a company having a ton of cash. After all, it helps insulate the firm against tough times, and it gives companies more options for future growth. At the same time, too much moolah on hand can indicate that management isn’t smart enough to figure out how to put the money to work, so it benefits shareholders through increased earnings growth and a higher stock price.
With interest rates at historical lows, keeping a lot of cash means a company could be losing out on the higher return it could gain by investing in a new project or acquisition aimed at expanding the business. That certainly doesn’t appear to be the case with Pfizer, which has said it was cutting billions from R&D and looking to save another $1 billion by cutting expenses. Moreover, Pfizer appears to be more in the divestiture than acquisition mode, putting both its animal health and nutritionals businesses on the block.
Investors need look no further than Apple (NASDAQ:AAPL) to see a company that knows how to puts its cash to work to benefit investors. While the three drugmakers mentioned here all have excellent dividend rates, Apple has never paid a dividend. That’s because Steve Jobs and the other company executives have done a superb job of putting the company’s money into innovative products that have made Apple the undisputed leader in the computer industry — and made its shareholders wealthy.
At least Johnson & Johnson isn’t sitting on its cash pile. The company is buying Synthes, a Swiss-American medical equipment manufacturer, in a $21.3 billion deal that will give J&J a leading position in the main orthopedic device markets. The acquisition will increase J&J’s global reach, particularly in fast-growing emerging markets. That’s consistent with statements from all three cash-rich pharma companies, who have said their big investments will be in growing markets outside the United States.
J&J did disappoint some analysts and investors by using stock and cash to pay for Synthes. They thought the company would have been better off with an all-cash deal because of tax advantages.
Merck should see its cash hoard grow as it cuts another 13,000 from its payroll to go along with the 17,000 staff that already were let go. The new round of layoffs will save the company about $1.5 billion annually, adding to the $3.5 billion in annual savings expected by the end of next year. The company will continue its hiring in China and other emerging markets.
Barry Cohen does not own any of the aforementioned stocks.