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Drug stocks under pressure
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April 20, 1999: 12:09 p.m. ET
Pharmaceutical, health-related stocks on defensive amid earnings reports
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NEW YORK (CNNfn) - While pharmaceutical stocks have mostly matched earnings projections, the results may not be good enough for many shareholders who are exploring other options, analysts said Tuesday.
Quarterly profit reports released by drug companies such as SmithKline Beecham and American Home Products came in basically satisfactory with few surprises Tuesday, but the sector continues to come under pressure due to disappointing earnings reports from Eli Lilly & Co. (LLY) and Pfizer Inc. (PFE) in the past few days, said Sergio Traversa, an analyst at Mehta Partners.
Traversa said that in recent days the sector has suffered a little bit of what high-tech related issues have experienced -- a market shift toward cyclical stocks that generally perform in line with prevailing economic conditions.
"Pharmaceutical stocks have been punished in the last few days because of the switch of the investor to more cyclical kinds," he said. "The valuation of the pharmaceutical sector is very, very high -- so now the focus of the investor is switching into industries with lower multiples."
However, drug stocks were generally performing better in early trading Tuesday. Lilly, which lost 9 percent of its value on Monday, was up 2-1/16 at 74-15/16. Pfizer, meanwhile, was up 2-3/4 at 120-11/16.
SmithKline Beecham (SBH) on Tuesday reported first-quarter earnings of $831 million, or 49 cents per share, a 16 percent increase over the parallel period and 2 cents a share better than Wall Street analysts polled by the First Call Corp. had predicted.
But SmithKline investors are more interested in developments on the new drug front than in the earnings report, said Traversa. The company's advanced new anti-diabetes drug Avandia is to undergo a review by the Food and Drug Administration on Thursday.
The FDA on Tuesday is also set to review a new painkiller from Merck (MRK), called Vioxx. The company hopes the drug will compete with Monsanto (MTC)'s anti-arthritis medication Celebrex. Investors were closely watching Monsanto stock Tuesday after The Wall Street Journal reported that Celebrex has been linked to 10 deaths and 11 cases of gastrointestinal hemorrhages in its first three months on the market.
Another drugmaker, Schering-Plough Corp., (SGP) reported Tuesday that its profit rose 20 percent, in line with estimates, citing a strong worldwide market for antihistamines and other medications. Net income totaled $539 million, or 36 cents per diluted share.
Meanwhile, American Home Products (AHP) reported earnings of 49 cents a share -- no change from last year. While Wall Street was expecting those results, the figures are not impressive, said Samuel D. Isaly, an analyst at OrbiMed Advisors.
"It was a rather disappointing performance. Their sales are dead in the water," he said. The company has an old product line and it will take a while for its new biotechnology acquisitions to begin to perform, he said.
In other news Tuesday, the medical-products company Mallinckrodt (MKG) reported fiscal third-quarter earnings of $54.1 million, or 75 cents per share, 11 cents higher than First Call estimates. Pharmerica (DOSE), a provider of pharmacy products and services for long-term care patients, said its earnings totaled $6.8 million, or 8 cents per share, down from $11.3 million, or 13 cents, a share in the year-ago quarter. The company cited costs associated with its merger with Bergen Brunswig (BBC).
Analysts said that while the drug sector is under pressure domestically, international markets are not acting as finicky.
"There is clearly a rotational move in the United States." Isaly said. "On the other hand in Japan there has been over the last month an increase in pharmaceutical shares. It's not too clear what's going on "
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