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Cramer’s Favorite Big Pharma Catch-Up Play

Tuesday, 9 Apr 2013 | 6:26 PM ET
Red Hot Big Pharma Worth Owning
Tuesday, 9 Apr 2013 | 6:25 PM ET
Not every stock needs to have a "turbo-charged" growth angle to it. Mad Money host Jim Cramer says big pharma stocks have been red hot, and discusses which ones are worth owning.

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"I want to tell you about my favorite big pharma catch-up play," said Jim Cramer.

While the other big pharma stocks have roared since the November lows, Pfizer up nearly 24%, Bristol-Myers up 32%, Eli Lilly up almost 24%, Cramer said his pick advanced less than 7%.

At this point it trades at just 12 times earnings, while its peers, on average, trade at 14 times earnings.

Who is this laggard? Merck.

Now it's worth noting there are fundamental reasons for the relative under-performance

- In December the company had to stop U.S. development of a new cholesterol drug after some bad trial results, and they had to pull the drug overseas where it was already approved.

- In February, Merck delayed the submission of its new osteoporosis drug to the FDA, which pushed back the company's new drug application to next year.

- In March there were some ugly headlines about a Type 2 diabetes drugs made by Merck.

However Cramer thinks those negative developments are only temporary. He thinks future developments will be very positive and as a result trigger a sharp change in sentiment.


Roel Smart | E+ | Getty Images

Here's why Cramer is bullish on Merck:

The company is finally over the patent cliff and on solid ground. "Right now, going forward, of all the big pharma companies Merck has the least exposure to drugs losing patent protection and going generic. That's huge," said Cramer.

Merck has a broad portfolio of products. "That includes a decent-sized animal health business that they could spin-off," Cramer said. "They also have a big and rapidly growing diabetes business and a vaccine division that's also growing fast."

Merck has an incredibly deep pipeline. "Merck has 35 drug candidates in phase 2 or phase 3 development—that's the second most of any pharmaceutical company out there," Cramer said. "Within their late-stage pipeline, the company has 16 phase 3 programs, the last phase before a drug can come up for FDA approval. And of those 16, there are five drugs that could be approved this year."

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What's the bottom line?

As drugs such as Merck's new ragweed allergy medication or its ovarian cancer drug get FDA approval, Cramer thinks Merck will come back into favor with the Street – not only will investors see new profit potential but they'll also be drawn by the 3.75% yield.

And as that happens, Cramer anticipates something called a reversion to the mean trade. That is, Cramer thinks this laggard will play a big game of catch-up as the Street assigns Merck a similar premium to its big pharma brethren.

Disclosure: On Tuesday April 9th Jim Cramer owned Merck on behalf of his charitable trust.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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