The Big Drugs for 2006

The credit-rating and stock-picking arms of Standard & Poor's agree that Big Pharma should show some gains this year despite incessant battering by generic competition.

"Despite near-term uncertainties over pricing and patent expirations, we think pharmaceuticals remains one of the healthiest and widest-margin U.S. industries," says Herman Saftlas, an S&P senior equity analyst. Saftlas issued a recent research report in which he raised his outlook to positive from neutral on the big-drug sector.

"We see longer-term prospects enhanced by demographic growth in the elderly (accounting for about 33% of industry sales) and by a healthy number of products in the pipeline," says Saftlas, who adds that many big drugmakers offer "attractive" price-to-earnings ratios and dividend yields.

Arthur Wong, an S&P credit analyst, wrote in a separate report on big U.S. drug companies that "much has been made of the pharmaceutical industry's lack of productivity and the dearth of major products. However, the pipelines are not empty."

Wong says 2006 will be a rough year for many big U.S. companies because around $23 billion in drug sales will succumb to patent expirations. Pfizer will lose 20% of its sales in the next three years due to generic competition, Wong says. However, Pfizer also has three drugs on S&P's list of the top 10 drugs to watch this year -- the inhaled insulin Exubera, the kidney and stomach cancer drug Sutent and the insomnia drug Indiplon.

Exubera and Sutent were recently approved by the Food and Drug Administration, and the agency is expected to act in May on Indiplon. Pfizer has a marketing and development deal with Indiplon's developer, Neurocrine Biosciences (NBIX Quote).

S&P's top 10 list focuses on drugs that should produce more than $1 billion in sales. "The commercial success -- or lack thereof -- of these products may have credit-rating implications," Wong's report says.