Big Pharma trounces Biotech in 2006

Merck's stock is up 30 percent this year, while Amgen and Genentech dropped 11 percent.

By Aaron Smith, CNNMoney.com

NEW YORK (CNNMoney.com) -- Big Pharma stocks trounced Big Biotech this year, as Merck and other drugmakers recovered from their woes, and Genentech slid after a couple of very good years.

Merck (up $0.05 to $43.60, Charts), the No. 4 U.S. drugmaker, took the stock market by storm in 2006, advancing about 37 percent year-to-date. America's top three drugmakers also enjoyed gains in stock price. The stock price of Pfizer (down $0.17 to $25.90, Charts), the biggest drugmaker in the world, climbed nearly 12 percent, while the price for Johnson & Johnson (down $0.40 to $66.02, Charts) rose more than 10 percent and Abbott Laboratories' (down $0.22 to $48.71, Charts) stock surged about 24 percent, according to Baseline.

"I think quite a lot of the performance in stocks like Merck and Pfizer is a recovery [from previous years,] and there's just a generally more relaxed view with what's happening with Medicare Part D," said James McKean, analyst for Atlantic Equities. McKean was referring to the Medicare plan, enacted Jan. 1, that increases government coverage of pharmaceuticals, which has resulted in increased sales for the drug companies.

And Merck appears to have cast off some of the bad mojo from its Vioxx scandal. This is although more than 27,000 lawsuits have been filed against the company since it pulled Vioxx off the market in 2004 because of the arthritis painkiller's links to heart attacks and strokes. Merck has vowed to fight them one at a time, and has beaten nine of the cases in court and lost four so far.

"Merck at the end of 2005 was very depressed from Vioxx," said McKean of Atlantic Equities. "That hasn't gone away, but I think the concerns about the huge litigation [costs] has gone away a bit."

And Merck has had some success as of late. In June 2006, the Food and Drug Administration approved Merck's Gardasil, the first vaccine for cervical cancer. The company got an image boost, and analyst projections for the vaccine's sales have ranged as high as $4 billion a year. If those projections become reality, then Gardasil could add nearly 20 percent to the company's annual sales. Merck also launched the diabetes drug Januvia this year, and analyst projections say that drug could bring in $2 billion annually.

What does all of this mean for Big Pharma going into 2007? That depends on who you talk to. Michael Krensavage, analyst for Raymond James, is bullish on Merck, with a "strong buy" rating, and a 12-month price target of $55 per share from the Dec. 20 close of $43.30. But Chris Schott with Bank of America and Joe Tooley of A.G. Edwards have "neutral" and "hold" ratings for Merck respectively. Schott rated Pfizer a "buy," while Krensavage and Tooley gave the company neutral ratings.

In 2007, McKean said that drug stocks could come under pressure from the Democratic-controlled Congress. The Democrats could force drug companies to negotiate drug prices directly with the government, which could drive down prices. But the analyst said that share prices for the sector should be able to hold fairly steady given the sector's relatively low price/earnings ratio of 16.5.

Big Biotech

Compare Big Pharma's stock market success to the records of Amgen (down $0.23 to $68.31, Charts), the biggest biotech in the world in sales, and Genentech (up $0.02 to $81.13, Charts), the industry's second-largest outfit. Both companies lost more than 12 percent of their stock value this year.

Amgen's stock loss was despite the fact that the biotech's earnings jumped 22 percent in the third quarter, beating forecasts. Notably, the biotech made CNNMoney.com's Blue-Ribbon Companies list for having appeared on six lists this year, including the Fortune 500 and Business 2.0's Fastest-Growing Tech Companies.

But Amgen's stock price was hurt by the looming threat to its top-selling drug, Aranesp, a treatment for anemia and kidney disease, said Christopher Raymond of Robert W. Baird. Aranesp, with $3.3 billion sales in 2005, faces potential competition from the Roche drug Mircera, which is awaiting FDA approval, said Raymond.

As for Genentech, its stock price nearly doubled between during 2004 and 2005 - which was a hard act to follow, said Raymond. At the time, many analysts said Genentech shares were getting pricey, so they were bound to lose some value.

"Genentech is a little different, because they're coming off a couple of years that were phenomenal," said Raymond.

Does this mean that it's time to buy Big Biotech stocks?

Projections going forward are lukewarm. Jim Reddoch, analyst for Friedman, Billings, Ramsey, rates Amgen and Genentech "market perform," or neutral. Reddoch projects moderate increases in stock price over the next 12 months: to $77 per share for Amgen, from its Dec. 20 close of $69.45, and $87 for Genentech, from the Dec. 20 close of $80.44.

The analysts quoted in this story do not own shares in the companies they discussed, though FBR, Bank of America and A.G. Edwards make a market or conduct banking with them.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.