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Damage done for Merck?
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December 12, 2001: 5:26 p.m. ET
Analysts: Merck stock plunge over, but others may be in same boat.
By Kim Khan
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NEW YORK (CNN/Money) - Merck & Co. Inc. shares continued to fall Wednesday, a day after the company drastically cut earnings forecasts for 2002, bringing most major drug stocks down.
But according to analysts the stock's rapid 10 percent decline Tuesday afternoon may have already accounted for the warning, and while analysts ratcheted down their estimates for Merck's 2002 and 2003 earnings, they were also encouraged by the company's drug development plans.
Industry watchers also noted Merck (MRK: down $2.18 to $58.52, Research, Estimates) is not alone in dealing with patent expiration difficulties.
No earnings growth in "transition year"
On Tuesday afternoon Merck announced its 2002 earnings would be flat compared with 2001, causing a "seemingly audible gasp" in the room, according to Lehman Bros. pharmaceutical analyst C. Anthony Butler.
The company said its bottom line will be hurt by lost revenue from patent expirations and an increase in research and development spending to accelerate drug development.
Analysts said the news means Merck's stock growth will be stifled for 2002, but they do not see a further drop and anticipate growth the following year.
"Though this news is clearly a disappointment, we believe that the damage is largely done and the 10 percent decline in the stock price fully compensates for the approximately 8 percent reduction in the earnings outlook for next year," Jami Rubin, pharmaceutical analyst with Morgan Stanley, said in a research note.
"I think that the stock's probably washed out for a while," said Tim Anderson, drug analyst with Prudential Securities.
"The company's not going out of business, but ironically it's acting like a cyclical, which drug companies aren't supposed to do," Anderson said. "The turnaround may not happen for a couple of years, but it's a well run company that just happens to be facing a lot of problems."
Merck's presentation of drug development, looking for 11 new drugs to be approved by 2006, inspired some confidence.
Rubin called the company's prospects for accelerating growth beginning in 2003 encouraging, noting anticipated sales contributions from cholesterol drug Zetia and arthritis drug Acroxia.
Deutsche Banc Alex. Brown drug analyst Barbara Ryan said in a note "it was prudent for Merck to slash earnings expectations in 2002 rather than grow at some paltry single-digit rate, so that the company can make the investments necessary for a revenue and EPS acceleration in 2003 and beyond.
Check out drug stocks here
"The entire drug group is not exactly having a stellar performance and may not until the second half of 2002 when we expect a number of positive catalysts, in the form of drug approvals, to emerge within the sector," Lehman's Butler said in a note.
Most drug stocks fell on the day, with Bristol-Myers Squibb (BMY: down $3.30 to $50.45, Research, Estimates) and Schering-Plough (SGP: down $1.79 to $36.86, Research, Estimates) particularly hard hit. Both companies were mentioned by analysts as having patent expiration problems, although Bristol-Myers also had to contend with news of an antitrust lawsuit filed by 28 states regarding anti-anxiety drug BuSpar.
"Bristol has patent expiration (approaching) for its diabetes drug (Glucophage) and so far they've not been willing to give a projected 2002 EPS, partly related to uncertainty about that drug," said Girish Tyagi, pharmaceutical analyst with ABN Amro. "In some ways that could be seen as cause for a downward revision."
"The concern is that Bristol could be the next shoe to drop as far as patent expiration and reining in the numbers," Anderson said. "But the company has a pretty decent late-stage pipeline."
"For Bristol 2002 doesn't look great, but 2003 has the potential to be a good year," he added.
In the lawsuit filed Wednesday, Bristol was accused of making inaccurate statements to federal regulators, preventing a lower-cost generic form of the company's anti-anxiety drug BuSpar from coming to market.
Schering-Plough also has patent concerns with its allergy drug Claritin, but analysts said that is more an issue for 2003.
"Schering will be coming out with a second generation (Claritin) drug in the next few months, so it depends how many people they convert (to the new drug)," Anderson said. "They could be in Merck's shoes a few quarters from now, but I don't think they have the visibility to say." 
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