Fueled by new blockbuster drugs and heavy advertising, drug companies aren't likely to disappoint investors when they report second-quarter earnings, beginning this month.

And while politicians and consumer advocates step up their calls to slash drug prices, the noise isn't likely to dampen investors' recent enthusiasm for drug stocks, which typically produce strong earnings growth no matter what the economy is doing.

Most major drug companies are expected to post at least double-digit earnings gains in this year's second quarter over the same period last year, analysts say. Some, like Pfizer ( PFE), which just bought Warner-Lambert, could show even stronger gains. The maker of Zoloft for depression and Viagra for impotence is expected to post a 22% gain in second-quarter earnings when it reports in late July.

Live Long and Prosper

"It's all being driven by new product flow and increased utilization of prescriptions," says Jeff Kraws, drug industry analyst with Gruntal, which doesn't do underwriting for drug companies. "People want to live longer. They realize that taking their medicine is good for them."

Feeling No Pain
Analysts expect drugmakers to report 12% earnings growth
Company Reporting date Quarterly EPS estimate Year-ago earnings Projected change
Bristol-Myers (BMY:NYSE) July 18 54c 47c +15%
Pfizer (PFE:NYSE) July 19 22c 18c +22%
American Home (AHP:NYSE) July 20 32c 34c -6%
Lilly (LLY:NYSE) July 20 60c 52c +15%
Merck (MRK:NYSE) July 24 69c 61c +13%
Pharmacia (PHA:NYSE) July 25 47c 40c +18%
Schering-Plough (SGP:NYSE) July 25 43c 37c +16%
SmithKline Beecham (SBH:NYSE ADR) July 25 46c 40c +15%
Glaxo (GLX:NYSE ADR) July 31 91c* 83c +10%
AstraZeneca (AZ:NYSE ADR) Aug. 4 42c 43c -2%
Source: First Call/Thomson Financial. *First-half figures.

Prescription chartbusters this time around are expected to include fast-growing arthritis drugs Vioxx from Merck ( MRK), Celebrex from Pharmacia ( PHA) and Enbrel from American Home ( AHP) and Immunex ( IMNX). And Pfizer's Viagra is no slouch: The drug generated sales of $333 million in the 2000 first quarter, marking a 58% rise on a year ago, and new prescriptions continued to rise in the second quarter, according to IMS America, a market research firm.

Analysts will also be looking at the impact of mergers on companies such as Pharmacia, which bought Monsanto, and Pfizer with Warner-Lambert. Companies typically buy competitors to expand product offerings and cut costs as a way to grow earnings, and the industry continues to consolidate. Pharmacia completed its merger with Monsanto in April, and Pfizer joined with Warner-Lambert in June. More mergers can be expected if companies fail to meet expectations over several quarters.

"Some newly merged companies will have some incentive to show good numbers," says C.J. Sylvester, analyst with PaineWebber, which does underwriting for drug stocks. "Pharmacia was a little weak in the first quarter, so they will really have to show some good growth." That company is expected to show a 17.5% gain in earnings to 47 cents in the second quarter, according to a consensus forecast compiled by First Call/Thomson Financial.

The Outcry

The earnings come amid a national outcry over rising pharmaceutical prices and demands for more drug benefits for the elderly and others who can't afford them.

While Congress is debating various proposals along those lines, PaineWebber's Sylvester said such a plan is unlikely to be passed this year with Congress now focusing on election campaigns. Even so, any such program is likely to be a net neutral for drug companies, since rising sales to the estimated 13 million seniors without coverage would offset any price cuts for those drugs through a government mandated program.

Drug stocks, which generally declined last year and in the first few months of this year partly on worries over possible government price controls, have rebounded in recent months, reflecting reduced concern over price controls and rising confidence in the industry over blockbuster drug development. The Amex Pharmaceutical Index, for instance, has gained 46% since early March to close at 417 Friday.

"Clearly there is increasing noise for some form of drug benefit for seniors, but the likelihood of any legislation getting past is less than 10%," PaineWebber's Sylvester says.

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