This week everyone who bought drug stocks in search of companies with solid earnings growth will see whether they made the right moves.
So far, it looks like they did.
on Monday morning beat the analysts' consensus estimate by 2 cents a share, reporting that first-quarter earnings rose 19% to 63 cents a share. The earnings were pushed higher by sales of the insanity treatment
and chronic bone-breakage aid
The performance demonstrated that Lilly, like many drug companies, is finding its way through vast changes in the pharmaceuticals market. Top threats have included drug patent expirations, government and private price control demands, disappointing European markets and massive drug development failures.
While those issues won't disappear, most of the big companies that make up the $208 billion drug industry are expected to continue to hand to investors reliable earnings performance through blockbuster drugs or mergers.
"The industry is in great shape, prospects are excellent and it's undervalued relative to the
," says Leonard Yaffe, an analyst with
Bank of America Securities
who has an overweight stance on the sector.
Analysts are forecasting a solid first quarter for companies like
may do even better than the other drug makers, fueled by the blockbuster cholesterol-cutting drug
Drug stocks were shunned until recently. The
Amex Drug Index
reached a high of 425 early last year after years of the kind of steady inclined growth that cheers value investors. Then investors got spooked by the prospect of draconian government price controls for drug sales to the elderly, pushing the index down 31.5% to 291 last month.
"Drug stocks were hugely oversold last year and valuations were as cheap as they get," says Scott Shevick, an analyst with
who has an overweight rating on the sector.
But Congress, flooded with drug company political contributions, didn't enact price controls. And while some kind of government program to assist the 39 million
patients pay for medicine seems likely this year, analysts aren't worried.
Meanwhile, tech stocks began to weaken last month, and investors searched for companies they considered safe. The index rebounded to 358.9, up 23% from its March low.
Now, "the issue isn't Washington but relative earnings strength," says Bear's Shevick. "Will drug stocks outearn the world? They may."
Here's a big reason why: The 76 million baby boomers born between 1946 and 1964 are getting older and will pay for effective medicines to help them live healthier and longer. And keep in mind the growing legions of their parents who are getting older and staying around longer. Translation: a great market for diseases of the elderly, like arthritis, Alzheimer's and osteoporosis.
"People are getting older and they are consumers of more and more medicines," says David Saks, chief investment officer for
Gruntal Medscience Fund
, repeating the mantra of long-term drug stock investing. "That won't change."
Looking for investment gains by waiting for people to get older and take more medicine might seem like putting your money in savings bonds or a passbook account. But that's only one side of the equation. The other is the ability of drug makers to come up with new blockbusters like the super-aspirin
, developed by
and co-marketed by Pfizer;
, SmithKline's diabetes drug; and
from Pfizer, all of which flew off the shelves when first introduced.
Merck, for instance, is expected to post first-quarter gains thanks to newer drugs like the fast-growing hypertension drug
and the asthma drug
The lesson, if there is one, is that people will always need drugs and the drug companies are getting better at making them. And with an aging population, volumes are bound to steadily increase. Furthermore, an explosion of genetic information is likely to lead, in coming years, to better drugs for treating long-term disabilities, ensuring a steady flow of money to drug companies. And if drug companies can't make their own drugs, they will get them from other companies, whether through alliance or acquisition.
Either way, it seems that investors looking for earnings are indeed picking the right stocks.