Is Big Pharma Turning Around?

Are big pharmaceutical stocks in the midst of a turnaround?

“A turnaround could be at hand,” Cramer said Monday. “After years where the prospects for these companies kept deteriorating, they can finally look forward to a future that's brighter than the recent past.”

Investors have steered clear of these stocks because all of the major pharma companies are losing patent protection on their largest products in about a 12-month window. From 2010 to 2014, roughly $90 billion worth of branded drugs are going generic. Nevertheless, Cramer thinks these stocks are starting to rally because “this is as bad as it gets.” Big pharma stocks could continue to go higher, he said, because they are still trading at depressed price-to-earnings multiples with juicy dividend yields.

To play the resurgence in pharma, Cramer is betting on drug companies with potential blockbuster products in the pipeline that could fill the earnings void created by the patent expirations. Take Merck, for example.

The Whitehouse Station, N.J.-based company is currently developing an experimental heart drug for those with good or bad cholesterol levels. Anacetrapib essentially helps lower the “bad cholesterol” while raising “good cholesterol,” thereby reducing the chance of heart disease. Although currently in Phase III development, it could be years before it enters the marketplace. When it finally does hit the market, though, Cramer thinks it could potentially generate up to $10 billion in annual sales for Merck. In the meantime, investors can enjoy a 4.3 percent dividend yield.

In 2010, Merck lost patent protection on two hypertension drugs and will lose protection on an asthma and allergy drug later this year. Cramer thinks it should still be able to deliver steady growth over the next five years, though, thanks to a slate of recently released blockbusters that address everything from diabetes to HIV.

Bottom line: Cramer thinks the worst is over for many big pharma names, so he thinks it’s a good time to buy Merck.

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