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May 2, 2013  Thu 8:14 AM CT

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No matter how many times I say it, people don't seem to get it.

The pharmaceutical business is not about near-term estimates or earnings just reported--it's all about pipeline, what's in the works, what could be blockbuster.

We saw all of that play out yesterday. First, Merck reported a quarter that was widely panned as people decided that the company's had it. But Merck has 35 drugs in the pipe, and many of these could add very much in the out years. That's why Merck's committed to buying $15 billion of its stock now, because management knows that it has some huge drugs that will be terrific in the future.

So why not try buying back $15 billion dollars in stock, or 10 percent of the company, in the interim? Why not give people a 3.75 percent yield to wait for the Phase II and Phase III drugs that will be powering the numbers when 10 percent of the company was bought in cheap?

But then there's Allergan. I had high hopes for its macular degeneration drug because Allergan has such a fabulous ophthalmological pipeline. But the drug's being delayed because results aren't up to snuff, so the stock falls about 13 percent.

Meanwhile, this great news for Regeneron, which has the best current drug out there for macular degeneration, and the competitive woes from a much more establishes company just vanished. That gives Regeneron more money to develop its pipeline, assuring you more growth in the future. It doesn't hurt, by the way, that Regeneron's stock was heavily shorted because it went into the S&P 500 the night before, causing a spike that wiseguys thought would be given up today.

TheStreet.com logoWe've had some tremendous earnings disappointments from high-profile drug companies that simply ended up meaning nothing. Consider Lilly. It didn't hit the number, but it sure held out hope for a valid drug to treat Alzheimer's. We didn't hear anything blowout about the pipelines of Pfizer and Bristol-Myers, so those legitimately sold off. But Pfizer is committed to bringing out value in other ways, including splitting the company up, so the pipeline isn't as important as it is for the others.

Johnson & Johnson has a terrific pipeline as well as a chance to split up, so it is still worth betting on. The best of all might be GlaxoSmithKlein, which has a robust pipeline AND a good yield, very similar to Merck, which obviated the worries about the near term. That's why it didn't get hit when it missed sales estimates.

How am I so sure that pipeline matters the most? Because in the 1980s Merck seemed to be out of gas. Its big heart-drug franchise was losing steam, and other products weren't moving the needle. But it was working on a promising drug that lowered cholesterol rather quickly.

The science of the importance of lowering cholesterol was unproven, but Merck thought it could show, over time, the value of that anti-cholesterol agent. The Street figured one day it could be worth $200 million to Merck. But the big move occurred as we followed the stock through the pipe, not after it was approved, as I watched Merck double and then double again as the trial results came through.

The amazing thing about the anti-cholesterol franchise? Pfizer, sensing how big it could be, bought Warner-Lambert, an also-ran company that had another cholesterol-lowering agent in its own pipeline. That turned out to be the smartest acquisition of all time in the drug world, as Lipitor did $13 billion in sales in its last year before going off patent.

By the way, if you had focused on Pfizer's near-term earnings during the period it bought Warner-Lambert , you would have been shorting the heck out of the stock. And because pipeline is what matters, you would have been dead wrong.

Disclosures: Cramer's charitable trust is long JNJ and MRK.
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