Drug earnings: Generally healthy

Even with setbacks at Pfizer and Novartis, analysts say the results from some industry leaders show solid footing.

By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Third-quarter results from drugmaker Pfizer, Novartis, Lilly, Baxter and Wyeth varied widely Thursday, but shared one common theme: solid financial foundations.

"They're all pretty solid fundamentally," said James McKean, analyst for Atlantic Equities, noting that a weak U.S. dollar had provided a boost to international sales for the pharma industry.

Barbara Ryan, analyst for Deutsche Bank North America, said in an e-mail that the earnings for the pharma group came in close to analysts' projections, "which is what matters to Wall Street."

Eli Lilly & Co. (Charts, Fortune 500) and Baxter Pharmaceuticals (Charts, Fortune 500) reported strong earnings for the third quarter, resulting from strong sales of Lilly's anti-psychotic Zyprexa and Baxter's anti-hemophilia drugs Advate.

Pfizer profit falls on Exubera charge

Baxter's stock surged 8 percent on the news, while Lilly made only slight gains.

Wyeth (Charts, Fortune 500) announced a slight dip in earnings, despite strong sales. The primary reason was because of charges from the closing of a factory that makes Enbrel, its drug for rheumatoid arthritis and psoriasis. Nonetheless, Wyeth stock was up 3 percent.

The most dramatic results came from Pfizer Inc., (Charts, Fortune 500) the world's largest company that derives all its sales from pharmaceuticals, and Swiss drug giant Novartis (Charts).

New York-based Pfizer said it's abandoning its inhalable insulin product Exubera, and incurred a $2.8 billion charge as it broke off all investments to the program. Exubera, a needle-free method of taking insulin, was once considered by analysts to be a potential billion-dollar blockbuster.

But Exubera, a tube-shaped dispenser for powered insulin, failed to win the hearts and minds of diabetics, with one diabetic journalist comparing the device to a "bong."

"Despite our best efforts, Exubera has failed to gain acceptance of patients and physicians," said Pfizer Chief Executive Jeffrey Kindler in an earnings release, noting that he "initially had high expectations" for inhalable insulin. "We have therefore concluded that further investment in this product is unwarranted."

While the failure of Exubera came as no surprise, the timing of its withdrawal seemed abrupt, said Robert Hazlett, analyst for BMO Capital Markets.

"Given the lack of success of the product, we might have thought something would occur down the road a bit, but the timing itself was a bit surprising to a number of us in the [analyst] community," said Hazlett.

Hazlett downgraded Pfizer's Exubera partner Nektar Therapeutics (Charts) to "market perform," or neutral. Nektar's stock plunged 13 percent.

Les Funtleyder, analyst for Miller Tabak, praised Pfizer for dropping Exubera.

"I like the fact that Pfizer came out and killed [Exubera]," said Funtleyder. "It's an example of reality-based management, and Pfizer has had problems with reality in the past."

Also, Pfizer said it was pressured by declining sales to its flagship drug Lipitor, a treatment for high cholesterol. As a result, Pfizer profit was less than $800 million, a mere fraction of the $3.4 billion in profit from the year-earlier quarter.

Nonetheless, Pfizer remains a relatively secure company, said Ryan, analyst for Deutsche Bank North America, in a published note to investors.

Ryan said Pfizer shares "will trade like a Treasury bond in the near term, until, in our view, a substantial commercial acquisition is made" which would "dilute" the company's dependence on the declining Lipitor. The patent for Lipitor expires in 2011, with an expected hemorrhage in sales.

Novartis, based in Basel, said it was cutting 1,260 jobs in the U.S., with most of the job cuts resulting from attrition, rather than layoffs. Novartis suffered a 12 percent dive in profit, excluding proceeds from the sale of nutrition units to Nestle, despite a 9 percent gain in revenue.

Novartis Chief Executive Daniel Vassella said the pain of the third quarter was from a necessary reorganization of the company.

"Following the successful divestments of the Medical Nutrition and Gerber businesses [to Nestle], we are now strategically focused on healthcare and products," said Vassella, in an earnings release.

Investors seemed unworried by the news, with moderate stock gains for Pfizer and Novartis.

Going forward, Pfizer and Lilly expressed confidence by raising their guidance. Lilly raised its adjusted earnings outlook for 2007 to between $3.50 and $3.55 per share. Pfizer raised the low end of its guidance range for 2007, to revenues of $47.5 billion to $48 billion, and adjusted diluted EPS of $2.10 to $2.15.

Funtleyder of Miller Tabak said it was difficult to offer a sweeping projection of the drug industry, but the best Big Pharma companies - he mentioned Merck & Co., Inc. (Charts, Fortune 500), which reports results Monday, as an example - have the most promising pipelines and recently launched drugs.

"The good ones are developing new products and the bad ones are dealing with cost-cutting," said Funtleyder.

The analysts quoted in this story do not own stock in the companies they discussed, but Deutsche Bank seeks investment banking business with the companies it covers. Top of page