Friday was a rough day in a bad news week for big drug makers. But the news leading to the hardest hit -- Merck -- may have been the least worrisome. Schering-Plough's manufacturing concerns, the FDA's decision not to approve a Novartis drug, and Pfizer's deal with the State of Florida all present more troubling issues.
 |
|
|||||
|
||||||
|
||||||
By
Shares of big drug makers were hammered today, after a week of negative news from Merck (NYSE: MRK), Schering-Plough (NYSE: SGP), Novartis (NYSE: NVS), and Pfizer (NYSE: PFE). Merck's earnings warning led to the largest sell off within the pharmaceutical sector. The stock dropped 8.42% to $68.20. But while hardest hit, the company may have provided the least justification. The news for drug makers took place against major business concerns: Relentless pressure to produce two to three major new drugs a year, declining revenues from best-selling drugs coming off patent protection, and greater government and insurance company pressure on drug pricing (Whitney Tilson analyzed one aspect of this topic in April.). Against these measures, Merck's news was the mildest. Merck warned that Q2 EPS would range from $0.77 to $0.79, below Street consensus of $0.82. It projected full-year earnings from $3.12 to $3.18 a share, down from the previous $3.15 to $3.25, against analysts' consensus estimates of $3.20. The company attributes the shortfall -- emphasis on short -- to foreign exchange effects and somewhat slower than expected sales of its Vioxx, Cox-2 inhibitor arthritis drug. But Merck said only that Vioxx would not hit the top of its estimated $3.0 billion to $3.5 billion first-year sales range. Hardly shabby for that drug and, next to the company's four other drugs pulling in well over $1 billion a year, certainly a minor development that the company will easily weather. Investors may have been skittish because the company needs to keep the new drugs coming to make up for patent expirations on Merck's Mevacor cholesterol drug and Pepcid heartburn and ulcer treatment. Schering manufacturing problems continue The FDA wants more data from Novartis Worse, The Wall Street Journal reported today that many of the sickest patients taking Novartis's recently approved Gleevec chronic myeloid leukemia treatment -- ballyhooed on the cover of Time, no less -- are developing pronounced resistance to the drug. Novartis had previously shown its best results with early stage patients, but the latest results are still sobering for a significant patient market. Declining drug prices? Pharmaceuticals good for investors? Zeke Ashton, Motley Fool Research Analyst and Editor of The Motley Fool Select, takes the long view. "Pressures on the big drug makers likely mean that the era of 15% annual returns is over, but their cash, research and development expenditures, 2% dividend yields, and P/Es as low as the twenties provide the prospect of safe, steady returns, over the next five to 10 years." Zeke went on to say that "Pharmaceuticals went through a similar phase back in the early nineties, when political pressures made big drug makers unappealing to many investors. In fact, pharmaceuticals hit such a low that Warren Buffett and Charlie Munger called their failure to make large buys in the sector in 1993 and 1994 as one of their biggest mistakes in their long careers. While the prices today are not quite as attractive as they were then, the big drug companies are clearly unpopular now, which has been historically a great time for investors to consider the sector." Bottom line? Investors eyeing the sector need to distinguish between the bumps in the road and chasms, between slightly slower sales at Merck and the bigger problems at Schering-Plough and Novartis. Tom Jacobs (TMF Tom9) currently causes others to need medication but takes none himself. At press time, he owned no shares in companies mentioned in this story. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
While the market overreacted to the Merck news, other drug makers served up more serious news. Schering-Plough stock was hit 6.54%, falling from $40.50 to $37.90, after the company announced that the Food & Drug Administration (FDA) found continuing problems at the company's manufacturing facilities in New Jersey and Puerto Rico, further delaying the introduction of Clarinex, its allergy medicine hoped to make up for sales of Claritin as it loses its patent protection in 2002. Schering-Plough last announced FDA concerns over manufacturing in February, and investors are correct to ask, what the heck is taking so long?
Novartis had a week from hell. First, the FDA failed to approve its Zelnorm drug for irritable bowel syndrome, which industry observers estimated to be a $1 billion a year seller. This also hurts the Swiss giant's U.S. marketing partner for the drug, Bristol-Myers Squibb (NYSE: BMY), and is the second major disappointment for sufferers of this condition, after GlaxoSmithKline (NSYE: GSK) pulled Lotronex last year.
Finally, worldwide number one drug maker Pfizer and the State of Florida have reportedly reached a deal through which Pfizer's drugs will be listed on the state's Medicaid preferred drug list. Unlike others, Pfizer won't have to offer price rebates, but it must save the state money through providing disease management services to chronically ill patients. This is the tip of the iceberg for drug makers, who face a slew of government reforms and pressure to reduce drug prices, cutting into profits that justify years of research and development that produce more dry holes than gushers. (You can learn more about how drugs go from lab to market at our InDepth: Pharmaceuticals page.)
Yet some big pharma are selling at price-to-earnings ratios and dividend yields not seen in years: trailing-12-mos. dividend
company mkt. cap. sales P/E yield
1. Pfizer 271 29,151 49 0.98%
2. GlaxoSmithKline 176 27,791 31 1.01
3. Merck 158 42,858 25 1.83
4. Johnson & Johnson 145 29,611 30 1.36
5. Bristol-Myers Squibb 106 18,354 26 1.99
6. Novartis 103 35,805 22 1.37
7. AstraZeneca 87 17,497 30 2.09
8. Eli Lilly & Co. 86 11,216 28 1.43
9. Abbott Labs 81 13,751 44 1.58
10. American Home Prod. 80 13,375 N/A 1.48
11. Pharmacia 64 18,488 48 1.05
12. Schering-Plough 56 9,746 25 1.58
RSS Headlines
Fool UK
