Drug Stocks Could Regain Their Health
For years, drug company stocks had good reason to be depressed. Drug patents have been expiring, allowing generic competitors to snatch away profits. After Merck lost patent protection on its cholesterol-lowering Zocor last June, the drug's third-quarter sales plunged by 65 percent from a year earlier. Between 2005 and 2007, Pfizer has either lost or will lose patent protection on seven drugs that make up more than a quarter of its sales.
And drug development problems also plague major companies. After unexpected deaths, Pfizer pulled the plug last year on trials of a potential blockbuster drug to raise levels of so-called good cholesterol, while reducing the bad. Merck took arthritis drug Vioxx off the shelves late in 2004 after it was linked to increased risk of heart attacks. Safety concerns have prompted the Food and Drug Administration to limit already slow drug approvals in 2006, hampering companies' plans to boost sales. Finally, 2007 is expected to bring a shaky start for pharmaceutical shares, as a new, Democrat-controlled Congress looks into lowering Medicare drug prices.
Cut-rate prices. So, why should investors bother with the troubled sector? First, with a Republican president in office, major Medicare changes are unlikely for the next two years. "The bite that comes after rhetoric is never as bad," says Les Funtleyder, an analyst at Miller Tabak. Once the uncertainty about Medicare dies down, investors will focus on balance sheets, not legislation, he says. They'll find that industry woes have left some drug company stocks at bargain prices. The prices of Big Pharma stocks are trading at about 15.5 times earnings, down from 21 in 2001. After only modest gains in 2006, the sector might be poised for a turnaround.
Meanwhile, after long trouncing pharmaceutical stocks, biotechnology shares lost favor in 2006. Shares of biotech giants Genentech and Amgen declined, despite higher profits. Investors worried that Amgen's kidney and anemia drug Aranesp could come under attack from new approvals this year. Investors took profits in Genentech, whose stock price nearly doubled over 2004 and 2005.
Big drug companies are scrambling to fill pipelines either by acquiring companies with drugs closer to FDA approval or improving in-house research. Merck is banking on profits from two big 2006 approvals, cervical cancer vaccine Gardasil and diabetes drug Januvia. Big Pharma has also boosted results by cutting costs. Pfizer sold its consumer division to Johnson & Johnson in 2006 to concentrate more on its pharmaceutical business. Funtleyder predicts that 2007 will see the industry split, with companies that have been cutting costs and boosting pipelines perking up and those with continued problems sagging.
This story appears in the January 15, 2007 print edition of U.S. News & World Report.
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