No Love for Big Pharma Heading Into Second Half

"The company's newer products ... are driving earnings growth," says Albert L. Rauch of A.G. Edwards in a June 24 research report issued just before Wyeth guided higher. "With competitive pressure on Effexor and Protonix, this earnings growth is expected to become more difficult." Effexor is an antidepressant; Protonix is a treatment for heartburn and acid reflux disease.

Rauch is keeping a hold rating, partly because he says Wyeth hasn't completely shaken the financial impact of litigation and settlements emanating from the now-withdrawn fen-phen diet drugs, and partly because of "historical problems with execution at Wyeth."

Rauch also has a hold rating on Bristol-Myers Squibb, making him virtually an optimist among his peers. It has the most sell ratings (10) among Big Pharma companies, along with 12 neutral recommendations and three buy ratings, according to Thomson First Call.

The company "is experiencing multiple patent expirations and will likely exhibit no earnings growth for the next several years," he says in a late-June research report issued a week after Bristol-Myers Squibb settled a long-running investigation by the federal government into past accounting and sales practices.

"The company's valuation is dependent on its dividend yield," Rauch says, and the dividend depends on continued good sales of the anticoagulant Plavix and the schizophrenia drug Abilify. He expects no earnings-per-share growth through 2007.

Rauch is more charitable to Schering-Plough, and he is one of nine analysts issuing a buy recommendation vs. 11 with neutral ratings and six with sell ratings. Schering-Plough provokes the most divisiveness among Big Pharma analysts.

Rauch was one of the earliest to forecast a Schering-Plough turnaround, and he is sticking to his prediction that the company's growth rate will far exceed that of the industry average for the next few years. Clearly, the key to Schering-Plough's success is Vytorin, the combination cholesterol pill that it markets with Merck. In an early June report to clients, Rauch notes that Vytorin continues to be the fastest-growing cholesterol drug in the U.S.

Merck will need a lot more than Vytorin to revive itself. Although the company "has gotten through a significant round of generic competition," Rauch predicts a slight decline in the compounded earnings growth rate between 2004 and 2007. The cholesterol drug Zocor is starting to feel the effects of generic competition in Europe -- it loses U.S. patent protect in mid-2006 -- and Rauch is watching how well Merck can switch patients from Zocor to Vytorin, which combines Zocor and the Schering-Plough drug Zetia.

"We remain concerned about the company's modest earnings growth, weak pipeline, damage to its reputation and litigation risk" due to the Vioxx lawsuits, he says in a June 29 report, which reiterated a hold rating. He's not alone: There are 19 neutral ratings vs. five buy ratings and three sell recommendations.

Rauch doesn't own shares in any of the companies mentioned above. His firm has had a recent non-investment-banking relationship with each of the companies except for Merck.

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