Three cheers for the drugs.
In an otherwise gloomy market, most pharmaceutical companies will roll out heaping plates of double-digit earnings growth when they serve up first-quarter results, beginning next week.
The tech sector is in the dumps, dragging most of the economy with it. But recession or not, people still get sick and their doctors still prescribe drugs by the fistful. That makes the drug sector among the steadiest earnings performers. Looming in the shadows, however, is an increasingly difficult fight to stave off patent expirations for a large number of billion-dollar drugs.
"The fundamentals for the drug sector are strong," says David Saks, portfolio manager of the SG Medscience fund. "Earnings are not going to be spectacular, I expect to see growth of 10% to 11%, but that sure beats all the forecasts of doom and gloom in technology."On average, pharmaceutical firms are expected to post 12% earnings growth in the first quarter over the same quarter last year. This compares to an 8% drop in earnings for the broader S&P 500 compared with the year-ago quarter, according to Chuck Hill, research director at Thomson Financial/First Call. The news won't all be rosy. Schering-Plough (SGP), plagued by manufacturing problems, has already warned that first-quarter earnings will be off by as much as 15%, compared with the same quarter last year. And longer term, big drug companies face the stiffest challenge yet from generic drug makers and their supporters over the tactics used to delay the expiration of valuable drug patents. At stake is tens of billions of dollars in sales of some of the most heavily prescribed drugs on the market. But first, a quick take on what investors can expect from first-quarter results. Pfizer (PFE - Get Report), the largest drug firm in the U.S., is expected to post earnings growth of 24% over the year-ago quarter to 31 cents per share, making it the strongest performer in the drug sector. Barbara Ryan, analyst with Deutsche Banc Alex. Brown, sees sales of Lipitor, the company's cholesterol drug, reaching $1.4 billion in the quarter, up 27% from 2000's first quarter. Ryan has a market perform rating on Pfizer and her firm hasn't done banking for the company. Pharmacia (PHA) is expected to rack up 18.5% earnings growth from the first quarter of last year to 32 cents per share. Sales of the arthritis drug Celebrex should rise almost 23% compared with the year-ago quarter to $645 million, according to Ryan, who rates the company a buy. But sales will be down compared with the previous quarter due to increased wholesaler buying late last year before a price increase. Wall Street is expecting American Home Products (AHP - Get Report) and Eli Lilly (LLY - Get Report) to post earnings growth of about 15% over the same quarter last year. American Home will be led by strong sales of drugs like its antidepressant Effexor. Sales of Zyprexa, Lilly's antipsychotic drug, should meet expectations, but a slowdown could come over the next several quarters because Pfizer is set to launch a competing drug dubbed Geodon. Both Bristol-Myers Squibb (BMY - Get Report) and Merck (MRK - Get Report) should post 11% earnings gains compared with the same quarter last year, according to Wall Street expectations. Schering-Plough will be the only major disappointment. After a February warning, Wall Street expects the drug maker to earn 36 cents per share in the first quarter, about 15% below the year-ago quarter. Sales of the allergy drug Claritin are slowing, and the company's manufacturing problems have led to shortages in several of its dermatology and inhaled respiratory drugs. Jeffrey Chaffkin, drug analyst at UBS Warburg, says the key to getting Schering-Plough back on track is final approval for Clarinex, the company's successor drug to Claritin, which faces a loss of patent protection in December 2002. But U.S. drug regulators have delayed approval of Clarinex, partly because of the company's manufacturing problems. This spring's allergy season is already here, and approval before the fall allergy season is unlikely, he says. (Chaffkin has a buy rating on Schering, and his firm hasn't done banking for the company.) Investors looking beyond the first quarter see a mixed bag for drug stocks in the quarters ahead. Several companies have strong pipelines of new drugs that will fuel earnings growth, while others are vulnerable to slowing sales because of looming patent expirations. When drug patents expire, generic drug makers rush in to sell their own versions, pushing prices down as much as 80%.
|Drug Patent Sunsets
|2000 U.S. sales (in thousands)||Maker||Patent expiration|
|Source: IMS HEALTH, TheStreet.com research. U.S. data only.