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Mixed bag for drug earnings
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January 18, 2002: 6:43 p.m. ET
Pfizer and AHP expected to lead drug sector in 4Q earnings growth.
By Staff Writer Kim Khan
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NEW YORK (CNN/Money) - The drug sector saw many major companies miss earnings targets in 2001 as the traditional safe haven witnessed pharmaceutical stocks come under considerable pressure.
But according to analysts, the companies have now learned from their mistakes. They are unlikely to surprise investors for the final 2001 quarter, and probably for 2002, after giving comprehensive guidance.
"I think a lot of companies have already put expectations so low they haven't set them up for those missteps," said Adam Greene, analyst at Dresdner Kleinwort Wasserstein. "Last year [they] really set themselves up for a fall."
"I don't think we'll see too many surprises on the downside, as we're really in bargain basement territory here," Greene said.
Going into this week analysts are seeing very mixed performances for six major companies.
"Perhaps a dose of lithium will be necessary this quarter as big cap pharma revenues and earnings appear slightly bipolar for fourth-quarter 2001," Tony Butler, analyst with Lehman Brothers, wrote in a research note.
"Pfizer and American Home Products will be manic and poised to lead the group, Bristol-Myers Squibb and Merck appear to be stick in the middle and Eli Lilly and Schering-Plough will be down in the dumps," Butler said.
Pfizer and American Home Products are expected to provide the best performance in terms of earnings growth, as neither company is facing major patent expiration concerns.
Earlier this month, Pfizer reaffirmed its guidance for full-year 2001 earnings of at least $1.30 a share and for earnings in the range of $1.56-to-$1.60 per share in 2002.
The company also said annual sales of its best-selling drug Lipitor jumped 30 percent from 2000 and the company is looking to double its current earnings in five years.
In addition to strong patent protection, Pfizer's has 162 products in its research and development pipeline with 15 new drug applications expected to be filed by 2006.
Butler said as well as the big name revenue drivers -- cholesterol treatment Lipitor, depression drug Zoloft and anti-impotence drug Viagra -- allergy treatment Zyrtec and anticonvulsant Neurontin should also show strong growth.
Newly-released antipsychotic medicine Geodon is also one to watch, according to Butler.
Pfizer (PFE: Research, Estimates) plans to report fourth-quarter earnings the morning of Jan. 23, with analysts surveyed by First Call expecting the company to post earnings of 34 cents per share.
American Home Products is expected to be the other sector leader, with fourth-quarter earnings rising 17 percent from the year-ago period, as a wide range of products contribute to the health of its bottom line.
"With AHP we'll be looking at everything, just like Pfizer," Greene said.
Strong growth is expected from acid controller Protonix and depression treatment Effexor, with more modest growth from hormone replacement therapy Premarin and arthritis drug Enbrel.
According to First Call, AHP (AHP: Research, Estimates) is expected to earn 62 cents per share for its fourth quarter, $2.18 for 2001, with earnings expected to rise to $2.50 to 2002.
The company plans to report on Jan. 24.
Middle of the pack
Bristol-Myers Squibb is another company that's given investors fair warning, affirming earnings targets for the fourth quarter last month but saying 2002 earnings will fall from 2001.
Bristol-Myers called 2002 a "bridge year" as it expects a $1.7 billion decline in sales of diabetes Glucophage when the company loses exclusivity, and analysts will be looking closely at sales of that drug for the past quarter.
The company is expected to report fourth-quarter earnings on Jan. 24, with First Call's consensus number at 59 cents per share, a rise of 9 percent from fourth-quarter 2000.
Merck, which is expected to report fourth-quarter earnings of 81 cents per share, a rise of 8 percent, took the same track as Bristol-Myers, affirming 2001 targets and calling 2002 a "transition year."
White House, N.J.-based Merck said in December 2002 earnings would be below analysts' estimates, with its bottom line hurt by lost revenue from patent expiration and an increase in research and development spending to bring new drugs to market. Merck (MRK: Research, Estimates) said the expiration on the patent of heartburn and ulcer drug Prilosec, the world's best-selling prescription drug, will "significantly dampen bottom-line growth in 2002."
Analysts are now forecasts earnings of $3.13 for 2001, and $3.12 for 2001, according to First Call.
Sales of arthritis treatment Vioxx will be closely watched, with a number of analysts concerned about the performance of the drug.
Butler said he expects Vioxx revenue to dip 3 percent from the year-ago period, but sees sales of top-selling cholesterol drug Zocor jumping 29 percent year-on-year.
Merck plans to report its earnings on Jan. 22.
Bringing up the rear
Eli Lilly (LLY: Research, Estimates) will feel the full brunt of losing its patent on depression blockbuster Prozac this quarter, with analysts surveyed by First Call looking for a 14 percent drop in year-on-year fourth-quarter earnings to 60 cents per share.
If that wasn't enough, the company said last month the U.S. Food and Drug administration has identified quality control issues at certain plants which could delay the approval of osteoporosis treatment Forteo and an injectable version of psychosis and schizophrenia drug Zyprexa.
But the company's standard version of Zyprexa could be a revenue driver, and analysts and investors will be interested in sales of sepsis treatment Xigris, which is predicted to be a blockbuster.
Earlier this month, Lilly announced early Xigris sales which were in line with analysts' forecasts.
Lilly will report earnings on Jan. 24, the same day as Schering-Plough, which is also looking at a decline in earnings from the same quarter a year ago.
Schering-Plough warned on fourth-quarter earnings and said it may have to pay up to $500 million to regulators to settle the quality control issues which have plagued its New Jersey and Puerto Rico plants.
Following the company's guidance, analysts are forecasting fourth-quarter earnings of 36 cents per share, a drop of 8 cent from the fourth quarter of 2000.
Analysts said they will be watching sales of allergy treatment Clarinex, the company's successor to its blockbuster Claritin, to see indications of how many patients are switching to the new version.
Also under the microscope will be sales of the newly approved combination of Schering's Peg-Intron treatment and its Rebetol capsules for treatment of chronic hepatitis C in patients with compensated liver disease.
While no surprises are expected for the fourth quarter, ABN Amro's Girish Tyagi said multiple ongoing drug launches should help Schering-Plough in the future. 
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