Drug industry faces tough second quarter
Big pharma is expected to see flat second-quarter earnings amidst patent experations.
By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney) -- Big Pharma is feeling the squeeze as name-brand drugs go off patent, which is why analysts are expecting a flat or modest second quarter for most of the biggest U.S. drug makers.

"Growth is going to be subdued," said Les Funtleyder, analyst for Miller Tabak. "There's been a lot of patent expirations lately and that's going to show up in the second quarter."

Funtleyder called second quarter expectations "uninspiring."

In fact, earnings aren't looking so hot for the third quarter either, with the exception of Schering-Plough (Charts), which continues to outperform its peers.

Big Pharma took its biggest hits in June, when Merck's (down $0.65 to $36.62, Charts) patent ran out for Zocor, its cholesterol-cutting blockbuster, and Pfizer's (down $0.18 to $23.31, Charts) patent on the $4.4 billion antidepressant Zoloft expired. This will have a profound impact on company sales, as both the branded-drug's price and the revenue it generates plummets as the drug opens up to generic competition. Pfizer is trying to hold on to its Zoloft sales, which totaled $3.3 billion in 2005, by producing its own generic version of the drug.

Pfizer, the world's biggest drug company, is expected to report earnings per share growth of 3 percent in second quarter, according to consensus analyst estimates from Thomson Analytics. Merck, the no. 2 U.S. drug maker, is expected to post EPS growth of 4 percent. Wyeth (down $0.13 to $44.27, Charts) is expected to report 4 percent growth in EPS, while Eli Lilly & Co. (down $0.15 to $55.78, Charts) has a stronger projection of 12 percent.

But Merck got some good news in the second quarter that could boost sales and earnings later on, with the Food and Drug Administration's approval in June of Gardasil, a vaccine to prevent the sexually transmitted virus that causes most cases of cervical cancer. Also, an advisory committee for the Centers for Disease Control and Prevention voted to provide funding for Gardasil immunization of children. This prompted Chris Schott, analyst for Bank of America, to raise his 2010 sales projection for Gardasil to $2.8 billion from $400 million.

Of all the big U.S. drug makers, Bristol-Myers Squibb (down $0.33 to $25.15, Charts) is expected to be hardest hit by patent loss, with a second quarter EPS decline of 33 percent projected by Thomson Analytics consensus. Bristol-Myers is feeling the loss of Pravachol, a cholesterol-cutting drug that was recently its second-biggest drug in terms of sales, which totaled $2.3 billion in 2005. The drug went off patent on April 29, and David Moskowitz, analyst for Friedman, Billings, Ramsey, said prescription volumes plunged 56 percent in the second quarter.

Schering-Plough leads in 2Q

Schering-Plough is the one bright spot in Big Pharma, with EPS growth of 30 percent projected for the second quarter by Thomson Analytics consensus. The company, which produces allergy treatments Clarinex and Nasonex, could get a lift from a particularly bad allergy season, according to Moskowitz. Also, Schering-Plough's earnings and revenues could benefit from Vytorin, a combination cholesterol drug the company produces with Merck.

Schering-Plough has endured patent expirations but has found ways to soften the losses. The company continues to make money from its blockbuster drug Clarinex, a new and improved spin-off of Claritin, which lost its patent at the end of 2002. Schering-Plough also sells a patent-protected over-the-counter version of Claritin, formerly a prescription drug that brought in $3 billion annually.

Andrew McDonald, analyst for ThinkEquity Partners, said patent expiration will continue to be a major problem for the drug industry going forward, with $100 billion worth of drug revenues losing patent over the next five years.

"What you've got to do is look out at the next five, six, seven years at the number of blockbusters going generic," said McDonald. "There's going to be more pain in the near future."

The analysts interviewed for this story do not own stock in the companies mentioned here. ThinkEquity and Miller Tabak do not do business with the companies. Bank of America Securities performs banking services for some of them and FBR seeks business with them.

Related: Schering a diamond in the rough Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.