Big Pharma's gain is biotech's pain

Schering, Merck, Bristol shares notched strong gains in first half; Amgen, Genentech took a dive.

By Aaron Smith, staff writer

NEW YORK ( -- Shares of traditional drug makers left biotechs in the dust in the first half of 2007, a role-reversal of the recent past, when investors favored the fast-growing but risky biotechs over so-called Big Pharma stocks.

Pharma stocks have crept up 4.6 percent year-to-date while biotechs slipped 1.2 percent according to figures from Thomson Baseline.

"[Big Pharma] has always traditionally been a safe haven group," said Joseph Tooley, analyst for A.G. Edwards & Sons. "Maybe there is some rotation of biotech into pharma."

To be sure, the overall performance for drug companies isn't worth bragging about. Pharma companies and biotechs both trailed the S&P 500, which rose 5.6 percent during the first half of 2007.

But since biotechs have consistently outperformed the pharma companies for the past few years, this shift is worth noting.

Hamed Khorsand, analyst for BWS Financial, said biotech's problems have a lot do with investor disappointment in some of the biotech industry's biggest names - Amgen and Genentech.

Amgen's (down $0.05 to $55.24, Charts, Fortune 500) stock has plunged 19 percent year-to-date, while Genentech's (up $0.66 to $76.32, Charts) stock dropped nearly 7 percent.

Khorsand said Genentech could be a victim of high expectations: He said even though the company has reported healthy revenue growth, the market wanted more.

Amgen, biotech's biggest name in terms of annual sales, has fallen on hard times with its top-selling anti-anemia drugs Aranesp and Epogen. In March, the Food and Drug Administration ramped up the warning labels for these drugs, citing a "higher chance of serious and life-threatening side effects and/or death" with this type of drug.

"Amgen has the problems with their anemia drugs," said Khorsand. "That's why the stock is falling off the cliff."

These are the type of problems that used to plague Merck & Co., Inc., (down $0.23 to $49.57, Charts, Fortune 500) which pulled the former blockbuster arthritis painkiller Vioxx off the market in 2004 when a study linked the drug to heightened risk of heart attacks. Since then, about 27,000 lawsuits have been filed against Merck.

But this year, Merck and other Big Pharma leaders have had impressive year-to-date gains: 14 percent for Merck, 20 percent for Bristol-Myers Squibb (up $0.28 to $31.84, Charts, Fortune 500), and 29 percent for Schering-Plough (up $0.52 to $30.96, Charts, Fortune 500).

Tooley of A.G. Edwards said Merck's performance this year has been driven by the launches of the diabetes drug Januvia and the cervical cancer vaccine Gardasil.

Also, Tooley said Januvia's competitors have fallen on hard times. Novartis' diabetes drug Galvus has been held up by the FDA and is behind schedule in getting approved for the market, while GlaxoSmithKline's diabetes blockbuster Avandia is being scrutinized by the FDA for possibly increasing heart attack risks.

GlaxoSmithKline's stock is down 7 percent year-to-date, bucking the Big Pharma trend.

But the rest of Big Pharma seems to have shaken off big troubles. Bristol has resolved its former issues by getting a federal court to block generic competition to its blockbuster Plavix, settling with federal investigators over the way it handled the Plavix issue, and replacing its scandal-tainted CEO.

Meanwhile, Schering is benefiting from the growth of its cholesterol-cutting drugs Zetia and Vytorin and investors are rewarding the company for its $14.4 billion acquisition of Organon, said Tooley.

But biotech's glory is far from over, said Sharon Seiler, analyst for Punk, Ziegel & Co.

Seiler said that biotech earnings -- including Amgen and Genentech -- have been strong. Plus, even though the overall sector has underperformed, there have been some biotech standouts.

Seiler pointed to Gilead Sciences (up $0.54 to $39.34, Charts), one of the stars of the biotech industry. She said Gilead's year-to-date stock gain of nearly 20 percent has much to do with success of its HIV drugs like Viread and the combo drug Atripla.

As for the biotech industry at large, Seiler said stocks will bounce back once a couple of the companies achieve "high profile and unexpected clinical successes."

"I don't think the honeymoon for biotech is over," said Seiler.

The analysts interviewed for this story do not own stock in companies mentioned here, though Punk, Ziegel makes a market in Gilead. Top of page