Strong results a mixed bag for drug stocks
Big Pharma put up some big numbers for the first quarter but it's still a stock picker's market for investors.
NEW YORK (CNNMoney.com) - Big drugmakers put up mostly strong earnings this week, triggering a variety of reactions on the stock market and a mixed bag of analyst expectations for the year.
Eli Lilly & Co. (Research) reported earnings gains on Thursday but fell short of expectations, prompting a slide in its shares. And Pfizer Inc.'s (Research) stock price was little changed after the world's biggest drugmaker topped forecasts on Wednesday.
Here's a closer look at the companies:
The no. 2 U.S. drugmaker, beat first quarter earnings projections on Thursday, sparking a 1.7 percent rise in its stock.
Merck attributed its earnings gain primarily to its $5 billion cost-cutting effort, but also first-quarter sales for its top-selling drug Zocor, which jumped 13 percent to $1 billion. But the company is losing patent protection on Zocor in June, with other blockbusters soon to follow.
Al Rauch, analyst for A.G. Edwards & Sons, rates Merck a "hold" because he's "concerned about generic competition," with the following blockbusters going off patent: Zocor in 2006, osteoporosis treatment Fosamax in 2008, hypertension drug Cozaar in 2009, and asthma drug Singulair in 2010.
"In the next six years, [Merck] has to replace 50 percent of their revenues," said Rauch. "They're talking about 10 percent annualized growth from 2005 to 2010. That's a lot of growth (to achieve) when in that time frame you're losing that much revenue."
But Les Funtleyder, analyst for Miller Tabak, believes that Merck is a good value going forward and stuck to his "buy" rating with a price target of $40, noting that the company's pipeline contains potential blockbusters like Gardasil, a vaccine to prevent cervical cancer that's awaiting a decision from the Food and Drug Administration.
Schering-Plough reported a first quarter net profit of $350 million, nearly triple last year, and soundly beating Thomson First Call consensus projections. Its stock jumped 2.7 percent.
"People reacted positively, even though there was a lot of cost reduction, because there was also a lot of growth," said Rauch, the A.G. Edwards analyst.
Going forward, Rauch, who rates the company a "buy" with a price target of $25, said Schering has a promising future with the cholesterol-cutting drugs Vytorin and Zetia. He noted Schering-Plough's successful cost-cutting efforts. The two drugs helped fuel an percent increase in sales for the first quarter to $2.6 billion.
Lilly reported a first quarter net profit of $835 million, or 77 cents a share, an increase of about 13 percent, beating consensus projections of 75 cents a share.
But Lilly's stock fell 1.9 percent on the news, and the company's long-term future seemed uncertain, as sales for its top-selling drug Zyprexa, a schizophrenia treatment, slipped 3 percent to $1 billion in the first quarter.
"Ultimately, we believe the rate of EPS growth will depend on the magnitude of commercial success of new drugs and the level at which Zyprexa's share stabilizes globally," wrote Barbara Ryan, analyst for Deutsche Bank North America, in an analyst note.
Ryan said there was "little opportunity for the stock to break out due to the lingering concerns over Zyprexa trends both in the U.S. and internationally."
Pfizer's net income soared and it soundly beat estimates. Results a year ago were hut by tax charges related to overseas earnings and the withdrawal of arthritis painkiller Bextra.
Rauch of A.G. Edwards maintains a "hold" rating for Pfizer because, like Merck, the company faces serious generic competition in the next two years as blockbusters like cholesterol-cutter Norvasc and allergy treatment Zyrtec lose patent protection.
Going forward, Rauch said that Pfizer's financial future is heavily dependent on research results, to be released at the end of this year and the beginning of the next, on experimental cholesterol-lowering drug torcetrapib.
But Ryan, the analyst for Deutsche Bank North American, believes Pfizer is a good value and reiterated her "buy" rating after seeing better-than-expected first-quarter sales for Lipitor, the cholesterol drug that's the world's biggest-selling medicine. But she was skeptical that Pfizer could meet its Lipitor sales goal of $13 billion for 2006.
"I don't think the market believes Pfizer's more optimistic view on Lipitor," she said.
To see how drug stocks have performed this year, click here.