A provider of safe, consistent growth, big pharmaceutical stocks had long been a staple defensive play. Being as these stocks now lack growth, Cramer on Thursday said it's time to retire the drug manufacturer space.
Cramer recommends selling out of companies, like Bristol-Myers , Eli Lilly , Pfizer , GlaxoSmithKline , Johnson & Johnson and Merck . Big pharma, he said, is fragile.
On Jan. 13, Merck said a cardiovascular medicine it is developing suffered a setback during clinical trials. The drug wouldn't have hit the market until 2016, but in the day that followed, the news sent the stock down by 6.6 percent. The stock continued to fall by 11 percent. Analysts figured the drug would provide Merck up to $2 billion in sales in 2016, so the loss of this potential drug was reason enough to give the stock a haircut.
"And it's not just Merck ... All of these companies are about to fall off huge patent cliffs, as many of their big blockbuster drugs go generic in the next few years and it's incredibly difficult to find new blockbusters to replace them," Cramer explained.
"The drug companies have all been insisting that their new drug pipelines will be able to offset some of the damage from patent expirations, but it's just not working. That's the lesson of Merck."
Starting in 2010, more than $90 billion worth of branded drugs will lose their patent protection through 2014. For Bristol Myers, 39 percent of its revenues are at risk. Eli Lilly could lose 34 percent of its revenues, Pfizer could lose 20 percent and Merck could lose 12 percent. In 2011, $15 billion worth of branded drugs will lose their patent protection. Big pharma doesn't have the pipeline to replace the lost sales either. Most drug companies are having to slash their research and development budgets, which makes it harder for them to develop the next big drug.
Drug makers had relied on prices increases to fuel growth, but that's become difficult under the new health care laws. As these companies face more competition from generic brands, they will be unable to raise prices anyway.
Cramer recommends swapping out of big pharma and into high-yielding stocks, like Enterprise Product Partners , 3M or McDonald's .
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