Notebook: More Than Meets the Eye in Pharmaceuticals' Tidy Growth

Also, Goldman Sachs' shrinking health care team, and Organogenesis' thinning fake-skin sales.
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Pharmaceutical companies tend to be enormously profitable and have so much cash that they can make sure they don't miss their numbers.

Oh yeah, they also guide analysts, making it awfully tough for them to miss the consensus earnings estimate, but hey, who doesn't? It's always interesting to look at the earnings per share estimate trends for two months or so before the drug companies report.


(PFE) - Get Report

is typically the first to report, usually on tax day or the day after. The rest follow the week after.

Ostensibly, it's going to be a good quarter for the drugs, according to a note from Jim Flynn, of

ING Baring Furman Selz

. He estimates that sales at major U.S. drug companies grew 14.7%, compared with 14.1% a year ago.

However, earnings growth, while still spectacular, is slowing. In the first quarter, earnings rose a projected 17.1%, which is pretty fab. But that's down from last year's 20.1% and the fourth quarter's 23.1%, according to Flynn.

Estimates have been falling for

Eli Lilly

(LLY) - Get Report

, as Prozac faces competition from


, an antidepressant from




Forest Laboratories


. In early February, Lilly was supposed to pull down 55 cents a share, according to

First Call

; now it's 53 centavos. Since early March, Lilly's stock has fallen 10% and is flat this year.

Also seeing a first-quarter squeeze is


(MRK) - Get Report

, which seemingly has more competition than


(MSFT) - Get Report

stifles. In early February, the Street expected the company to earn $1.09 a share in the first quarter (before a February 2-for-1 split). Now, it's 54 cents, or a penny lower after taking into account the split. Merck shares have dipped in the last couple of weeks, but are up 11% for the year as investors anticipate the potential blockbuster pain medication


, coming later this year.

More signs of unrest with the health care team at

Goldman Sachs


The firm has

yet to snag a big-name Big Pharma analyst. And now the non-Net but nonetheless hot upcoming IPO has lost a health care analyst to

Salomon Smith Barney

. The prize was Deborah Lawson, last year's No. 3

Institutional Investor

health care facilities analyst. Lawson garnered what is essentially a promotion to become the head of health care research at Salomon.

But Goldman staved off a couple of other departures. According to a half a dozen sources at

Merrill Lynch


and former Goldman Sachs employees, Merrill pursued Larry Keusch, a medical devices analyst, and offered a job to Steve Savas, a health care information services analyst last week. Goldman countered the Savas offer, as is a common practice on the Street, and ended up keeping them both. Goldman and Merrill wouldn't comment. Savas and Keusch didn't return a call seeking comment.

They talk about hockey-stick launches. That's when sales are flat for a while and then shoot up. Well, if


(ORG) - Get Report



is having a hockey stick launch, it's got a heck of a long blade.

The company has recently put out two pieces of sales information on Apligraf, an artificial skin used to patch up hard-to-heal wounds. It reported its full-year results March 29. Then on April 6, in its monthly report on the number of sites ordering Apligraf, it previewed first-quarter sales. Organogenesis gets an estimated 20% to 30% of sales;


actually sells the product.

The bulls were expecting strong Apligraf sales by now. In a July strong buy recommendation from

Jesup & Lamont's

Howard Curd and Eric Felker, the firm forecast U.S. Apligraf sales of $21.6 million for last year. That equals 22,137 patches. The J&L report expected Organogenesis overall to have $8 million in total revenue in 1998, with a $2.8 million royalty payment. (Curd didn't return a call seeking comment.)

Organogenesis actually reported $9 million in revenue for 1998, "beating" the number. But product sales, including royalties, for the year were $1.2 million. That suggests maximum 1998 sales of Apligraf in the range of $4.8 million for Novartis, not enough to keep the Swiss' cafeteria stocked with cheese. Novartis officials couldn't be reached for comment.

In the fourth quarter, Organogenesis's product sales were $335,000, lower than in the third quarter. The company also has yet to report the cost of goods for the product, so it is impossible to tell how much it costs Organogenesis to make Apligraf. "It's not significant to break those out at this point," says spokeswoman Carol Hausner.

Hausner says the company still expects to turn profitable by year-end. It would take an annual Apligraf sales rate of $100 million, yielding roughly $25 million to the biotech. That means sales of about 7,000 to 8,000 patches a month, according to the company. The J&L report foresaw 1999 Apligraf revenue of $67.2 million, or 68,940 patches sold. The firm expected Organogenesis to have $27.3 million in revenue this year.

And Alan Tuck, the company's chief strategic officer, has repeatedly said the ramp would start in the first quarter.

Alas, the units sold in the first quarter were 1,585, according to the April 6 announcement, which doesn't suggest being well on its way to the 68,940 Jesup forecast. Yes, the 1,585 is up almost 50% from the fourth quarter. But it's less than $1.6 million in sales. If sales rise 100% each quarter this year -- implausible given the molasses pace -- it will still miss the Jesup & Lamont number by more than half.

Organogenesis keeps the faith. "What we have said is that the focus in 1998 was in establishing a user base. The focus in 1999 is to expand that base. We expect to see an acceleration of in Apligraf sales in 1999," says Hausner.

The boost will come because Novartis is increasing its sales and promotional activities, data will come out for other Apligraf uses and the product will be launched in Europe, she says. The product is ramping and seeing "good growth" in the number of sites ordering and reordering product, she adds.

Amid all this, the company has a fully diluted market cap north of $400 million, with the stock at 11 13/16 midday Friday. The stock has been on a slow spiral downward, but one short-seller says, "With those numbers, the spiral should be acute."

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