Drugmakers to take earnings medicine

When a patent expires on a name-brand drug, the price plunges along with the sales, as generic drugmakers start producing their low-cost versions. Makers of name-brand drugs are scrambling to replace outgoing blockbusters with new ones.

Some $16 billion worth of drugs are going off-patent in 2007, following $23 billion worth of patent expirations in 2006, according to research firm IMS Health.

Generic pressure played an active role in squeezing first-quarter profits for Pfizer Inc. (up $0.27 to $26.94, Charts) and Bristol-Myers Squibb (up $0.10 to $28.42, Charts), according to analysts.

Joseph Tooley, analyst for A.G. Edwards, wrote that Pfizer's earnings would be impacted by the "earlier-than-anticipated" loss of its $4.9 billion-a-year blood pressure drug Norvasc, following a patent battle in March.

Also in his published note, Tooley said that Pfizer suffered "a significantly slower start than we had previously expected" for Exubera, the first form of inhalable insulin for diabetics.

Pfizer has dominated the drug market for years, but it's issues with outgoing blockbusters contributed to Johnson & Johnson's (up $0.59 to $62.94, Charts) succession as top-selling Fortune 500 drug company. (Unlike Pfizer, Johnson & Johnson isn't just a drugmaker; the company also produces consumer products.)

Bristol-Myers' blockbuster Plavix was still getting squeezed in the first quarter by privately held competitor Apotex, which flooded the market in 2006 with a generic version of the blood thinner until it was blocked by a court ruling.

Bristol could emerge as the hardest-hit drugmaker in the sector. It is expected to report a 28 percent plunge in first-quarter earnings per share, to 23 cents, according to Thomson Financial's analyst consensus.

But Bristol is expected to recover later in the year, when its competitor's generic supply of Plavix dries up, wrote Tooley. Analysts project a 17 percent jump in earnings per share to $1.27 for all of 2007, according to Thomson.

For the drug sector overall, Ryan of Deutsche Bank wrote that first-quarter earnings "should come in ahead of, or in line with expectations" and "more importantly, every company appears well positioned to deliver improved EPS results in 2007."

Ryan attributed her positive expectations for the industry to a "modest" sales boost resulting from the new Medicare plan's broad drug coverage, cost-cutting campaigns from some of the larger drugmakers, and sales from new products.

Pfizer and Merck & Co. (up $0.16 to $50.37, Charts) are both engaged in multi-billion dollar restructuring plans to take some of the sting out of the loss of blockbuster drugs, such as Norvasc and the antidepressant Zoloft, in the case of Pfizer, and the cholesterol-cutting Zocor in the case of Merck. Pfizer announced in January that it was letting go 10,000 workers, and closing or selling five plants in order to offset its sales vacuum.

Big Pharma standout Schering-Plough (up $0.08 to $28.02, Charts) garnered the most bullish analyst projections, with first-quarter earnings per share expected to surge 22 percent to 29 cents, according to a consensus of analysts from Thomson Financial.

Tooley of A.G. Edwards said the biggest driver in Schering-Plough's first-quarter performance was the "continued strong market demand" for its cholesterol drug Vytorin, a combination therapy that it shares with partner Merck and Zetia. The combination totaled nearly $4 billion in 2006, divided between Merck and Schering.

Eli Lilly & Co. (up $1.41 to $58.29, Charts) was the first of the industry leaders to report earnings. On Monday, it announced a 39 percent plunge in first quarter earnings to $508.7 million, or 47 cents per share, from $835 million, or 77 cents per share. The figure includes special items like the company's acquisition of the biotech ICOS.

Excluding charges, Lilly reported EPS of 84 cents per share, beating the analyst consensus of 79 cents.

The analysts quoted in this story do not own stock in the companies mentioned here, but Deutsche Bank does seek business with most of them, and A.G. Edwards has received compensation from Pfizer and Bristol in the last 12 months for non-investment banking securities-related services.

Big Pharma teaches old drugs new tricks

Drug stocks