Cramer: Drug stocks are an even better way than tech to invest in innovation

Innovation has taken hold in the pharmaceutical space, and even CNBC's Jim Cramer is impressed.

The last year has been pivotal for top drugmakers as some rebranded, others combined forces and still others prepared to reshape their portfolios with spin-offs and strategic acquisitions.

But innovation — both broadly and in areas that had been left untouched for years, like heart failure — has separated the strongest players from the rest of the pack, Cramer said, speaking after the first day of J.P. Morgan's annual Healthcare Conference in San Francisco.

"Companies that know how to innovate and strut their stuff turn into market-leading stocks that can create tremendous wealth, even on days where the market roars higher and then gives up much of the gains," Cramer said on "Mad Money" as stocks rose slightly in a turbulent trading session.

Not long ago, the longtime stock-picker would have directed investors to invest in technology stocks if they wanted to profit from innovation. But "tech's hit a bit of a wall," and things have improved dramatically for Big Pharma since industry leaders realized that putting money towards innovation could be their next leg higher, he said.

"For the longest time, when we thought of Big Pharma, we thought about me-too drugs [and] patent extenders that endlessly raised prices for the same old remedies," Cramer said. "It almost seemed like these companies literally outsourced innovation and became little more than gigantic, big sales forces that pushed product."

"Yes, there's innovation in Silicon Valley. I'm hearing about some great technologies coming out of the Consumer Electronics Show in Vegas," he continued. "But you want investible innovation? The best of the best are here in San Francisco at the J.P. Morgan Healthcare conference."

Among the "Mad Money" host's favorite potential investments were Eli Lilly, which just made an $8 billion bet on cancer-treating franchise Loxo Oncology; Novartis, which is also betting on cancer and innovating in the heart-failure treatment arena; the newly innovative GlaxoSmithKline; Amgen, which along with Eli Lilly is developing cutting-edge migraine medicines; and Sage Therapeutics, shares of which soared Monday after a successful depression drug trial.

And while some will argue that drug stocks will outperform anyway because they tend to be the ones investors buy when the economy is slowing and the Federal Reserve is raising interest rates, Cramer thought there was more to the story.

"There's more to these drug stocks than that. They're not just a way to bet on a weaker economy," he said. "These are companies with real answers for real needs. They're making products that can't or won't be replicated for many years, and while these drugs are often very expensive, many of them are meant to help you get out of a hospital faster or ensure you never even go to one in the first place."

Disclosure: Cramer's charitable trust owns shares of J.P. Morgan and Amgen.

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