Wednesday: Drug Stocks Winning ... with a Big Exception

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By John J. Edwards III
Staff Reporter

With the market's wild 'n' crazy gyrations of the past few weeks, the drug sector has been a relatively healthy place to be. But if your portfolio was centered on

Pharmacia & Upjohn

(PNU)

, it's probably in intensive care.

P&U, formed in November 1995 by the merger of U.S.-based

Upjohn

and Sweden's

Pharmacia

, is diving today after it announced that its first-quarter results will fall well short of expectations. The

First Call

consensus expectation had been 48 cents per share, but P&U said the actual figure will be more like 37 cents.

The company has sloughed off 4 1/8 to 30 3/4 on the news, having reached a 52-week low of 30 intraday. But that's hardly the beginning of the stock's illness. The shares closed at 36 5/8 Friday and fell steadily each day since, and before that they had rattled down from a 52-week high of 44 3/8, set July 1.

From the high, that's a 21.4% plummet to yesterday's close of 34 7/8, in a period when the

S&P 500

gained 14.6% and the

Baseline

database's index of major drug stocks soared 25.4%.

So why does P&U, the world's ninth-largest drug maker, crumble while

Merck

(MRK) - Get Report

,

Johnson & Johnson

(JNJ) - Get Report

and

Pfizer

(PFE) - Get Report

rally? In a word, ineptitude.

As

The Financial Times

reported Thursday, P&U last week ruled out selling any of its noncore businesses to focus on pharmaceuticals. This despite a clamor from investors and market players urging it to get rid of things like its medical diagnostics, animal health, consumer health care, contract manufacturing and biotechnology businesses.

Of course, shedding poor performing units can be easier said than done. James Keeney, an analyst at

Rodman & Renshaw/ABACO

in Boston, pointed out that

Mallinckrodt

(MKG)

has been trying to sell its veterinary subsidiary since August 1996 without success. "If you can't sell them, there's no use giving them away," he said.

But P&U's problems extend beyond the outlying businesses and into what should be its beating heart. "The basic problem is that you've got a $7.3 billion drug company here with relatively few big products in the pipeline," Keeney said. "That's probably insufficient to move the bottom line here." The company's most promising drug, the incontinence treatment Detrusitol, won't be out until late this year or early next year, he said. Keeney rates the stock a hold and sees the company earning $1.95 per share this year, not approaching his original $2.10 estimate or First Call's $2.15.