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Drug stocks down on fears
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March 7, 2000: 1:32 p.m. ET
Big pharmaceutical makers struggle amid rate worries, political uncertainty
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - In the ever-widening divergence between "old economy" and "new economy" stocks, nowhere are the differences more apparent than between big-name pharmaceutical makers and highflying biotech companies.
As the technology-heavy Nasdaq composite index smashed through the 5,000 point barrier Tuesday - helped in part by unprecedented recent gains in the biotech sector -- blue-chip stocks again slumped below the 10,000 mark, led downward by a 30 percent drop in shares of household products maker Procter & Gamble Co. (PG: Research, Estimates) after a profit warning, as well as on the sagging performances from manufacturing, retail, food and other sectors.
The already struggling drug stocks were particularly beaten down. Dow components Merck & Co. (MRK: Research, Estimates), the biggest U.S. drug company, and Johnson & Johnson (JNJ: Research, Estimates) both hit year-long lows during the session, with Merck dropping 5 percent and J&J down 3.5 percent in early afternoon trading. Bristol-Myers Squibb Co. (BMY: Research, Estimates) - which has been particularly battered in recent days - Eli Lilly & Co. (LLY: Research, Estimates) and Schering-Plough Corp. (SGP: Research, Estimates) also hit new 12-month lows.
After a stellar 1998, drug stocks began to fall in 1999, amid uncertainty over the prospect of Medicare reform in Washington, worries about looming patent expirations on blockbuster drugs and general market concerns over interest rates. For all of 1999, drug stocks in the S&P 500 slipped 12.2 percent, compared with a 19.5 percent gain for the overall S&P 500 and an 85.6 percent surge in the Nasdaq composite.
"We have been expecting the whole first half of this year to be very poor for drug stocks, but it has turned out to be even worse than our worst case scenario," said Neil Sweig, a pharmaceuticals analyst at Ryan, Beck & Co. "The stocks continue to set new lows on top of prior lows."
Turning to biotech
Industry analysts say that investors are becoming more and more unforgiving about any negative news coming out of the drug industry and moving their money into all things technology related - the Internet, telecommunications and biotech. Biotech stocks, especially those in the hot genomics sector - the study of the composition and function of human genes - have been on a tear since late last year, although in the past few weeks they have experienced some significant profit taking and trading has been volatile.
"Right now since drug stocks aren't very attractive, any slight negative for any of the drug companies just casts a spell on them," said Premal Pajwani, who follows drug stocks for Schroder Securities. "There's been this reevaluation by investors that drug stocks belong to the "old economy." I'd argue against that, because at some point down the road, genomic companies are going to have all of this data and they're going to have to realize, 'what's next?'"
Shares of Bristol-Myers Squibb, for example, have plummeted about 23 percent over the past week after a federal judge in New Jersey stripped most of the U.S. patent protection on the company's lucrative cancer treatment Taxol, the company's second biggest selling drug.
A number of Wall Street brokerages subsequently cut their ratings on the stock, citing concerns about increased generic competition to Taxol, as well as worries about future sales of the company's diabetes treatment Glucophage.
But other analysts say that investors have overreacted, and that Bristol-Myers stock is now a bargain.
"We believe it's way overdone," CIBC World Markets analyst Steven Gerber said of the investor reaction to the Taxol ruling. "We believe that Bristol-Myers has the best near-term pipeline of any major drug company." He rates the company's stock as a "buy."
Biotech stocks - most of which trade on the Nasdaq exchange - were not immune from Tuesday's sell-off, however, although analysts tied the drops to profit taking after huge run-ups.
One stock that soared Tuesday was Abgenix Inc. (ABGX: Research, Estimates), which rose 31, or 10 percent, to 350, after announcing an agreement late Monday to provide Millennium Pharmaceuticals Inc. (MLNM: Research, Estimates) - another biotech high flyer - with its technology for antibody creation technology, which is designed to treat diseases such as arthritis and cancer.
A lot of uncertainty
Worries that more interest rate increases are in store from the Federal Reserve have put pressure on major pharmaceutical makers, industry analysts say. Meanwhile, biotech stocks are largely immune to such fears because many of the younger companies in the sector have little in the way of significant sales or earnings.
In addition, drug stocks have come under pressure amid political uncertainty in Washington over prescription drug costs.
President Clinton has proposed adding a broad new prescription drug benefit to the federal Medicare program - a proposal the pharmaceutical industry opposes, saying it could lead to price controls. Republicans say the Clinton plan is an attempt to score political points for Democrats without addressing the overall issue of spiraling Medicare costs.
The outcome of Tuesday's presidential primaries and caucuses could have a big impact on investors' sentiments about the drug sector, Pajwani said. Investors in the sector likely will be buoyed if George W. Bush soundly defeats Sen. John McCain in the "Super Tuesday" Republican races, he said, adding that Bush is seen as having "a less populist agenda" than McCain. 
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