Potent pharmaceuticals
Low prices could mean ripe
opportunity for stocks that are
expected to grow as baby boomers age
and ail
July 12, 1999
BY BOAZ HERZOG
FREE PRESS BUSINESS WRITER
People are popping more potent and pricey pills
than ever before. That's why Ken Stire is plopping
down more money to invest in companies that
make prescription drugs.
In the last couple of
months, Stire, a financial
planner at Clinton
Township-based KMS
Financial Services, has
scooped up shares of Eli
Lilly & Co. -- "one of
the best buys" -- and
Johnson & Johnson,
"which has a proven track
record," he said. Those
shares comprise 15
percent of his portfolio.
Now, he's eyeing other
drug stocks to buy.
"Considering what's going
on in the industry, the
stocks can only do one
thing, and that's go up," he
said.
Stire's optimism is shared
by many analysts who say
a combination of factors
-- including a recent drop
in stock prices, an aging
population, President Bill
Clinton's Medicare plan
and an interest rate hike
by the Federal Reserve --
make investing in U.S.
drug stocks a good idea.
"I'd be a buyer," said
PaineWebber
pharmaceutical analyst
Jeffrey Chaffkin. "For
people who want to buy
quality, high-growth
companies, these are ideal
stocks to own."
Many major drug
companies are trading at
prices lower than they
were a year ago. In the last year investors have
been fretting about everything from patents on
highly profitable drugs to the imposition of price
controls as part of Medicare legislation.
Through Friday, the American Stock Exchange
Pharmaceutical Index, a group of 15 widely held,
highly capitalized drug-making companies, was off
more than 4 percent so far this year. But some
companies in the index are off by 16 percent or
more. In comparison, the broader Standard &
Poor's 500 is up more than 14 percent for the
year and the Dow Jones Industrial Average up
almost 22 percent.
Many analysts believe this is a ripe opportunity to
buy drug company stocks at a bargain price.
Good time to buy
Taking a somewhat longer-term view, drug stocks
have performed consistently well. Many are
projected to maintain double-digit growth rates
into the millennium -- and for good reasons.
Prescription drugs have increasingly become a
perceived panacea. The explosion in
direct-to-consumer advertising in recent years has
made Claritin, Viagra and Prozac household
names and fueled demand for newer and more
expensive drugs. In addition, more drugs are
entering the market every year. The U.S. Food
and Drug Administration last year approved 39,
almost double the number a decade earlier.
U.S. drug spending is expected to grow about 10
percent a year through 2007, according to the
Health Care Financing Administration, the
government agency that runs Medicare.
The average American already has almost 10
prescriptions a year filled. An aging baby boomer
population will ensure that even more drugs get
taken. The number of people past retirement age
is projected to double, reaching 70 million by
2030.
Drugmakers had jitters about legislators' plans to
include price controls in proposals to alter
Medicare, the huge federal health insurance
program for the elderly and disabled.
But last month Clinton proposed extending
prescription drug coverage to the 39 million
Medicare enrollees. The industry liked that a lot,
and pharmaceutical makers "breathed a sigh of
relief," said ABN Amro analyst James Keeney.
The proposal didn't contain any drug restrictions
or price controls that would threaten the earnings
of major drugmakers, he said. Wall Street
responded by bidding up the prices of many of the
stocks.
Keeney and other analysts don't expect Congress,
so close to an election year, to pass the ambitious
plan, which would cost $110 billion over 10
years. Still, it's "inevitable some program will be
passed in the next Congress, but that's not until
2001," he said.
The Federal Reserve's decision to raise interest
rates a quarter of a percentage point late last
month also benefits drug stocks by helping slow
down a speeding economy, analysts say. The
change, they say, should prompt a switch in
capital spending from cyclical growth stocks to
companies highly insulated from economic
downturns, such as drugmakers.
Analysts' favorites
Aside from the external factors affecting drug
stocks, analysts like what the companies are
doing. Several analysts are particularly bullish on
Eli Lilly. The company's stock is up about 11
percent from the same time last year. But it closed
Friday on the NYSE at $74.38, down from a
one-year high of $97.75 on March 5.
Best known for its antidepressant Prozac,
Indianapolis-based Eli Lilly "has lots of little things
working in its favor," said Le Anne Zhao, a Ryan,
Beck/Southeast Research Partners analyst.
She said she doesn't expect Prozac's patent to
expire until 2004, although the company is being
sued by generic drugmakers that want to get their
versions on the market by 2001.
Eli Lilly also has benefited from Zyprexa, an
antipsychotic drug and the company's primary
source of recent revenue and earnings growth,
capturing almost 30 percent of the market share
since its launch in October 1996.
The company also launched a promising
osteoporosis pill called Evista last year, and
there's a drug in the works that will compete with
Viagra, the anti-impotence pill made by Pfizer.
Another underperformer, Pfizer's stock is almost
flat, year over year. It closed at $37 Friday, $1.67
below its price a year ago. It has fallen as low as
$28.67 Oct. 10.
"They've been hammered recently," said ABN
Amro's Keeney, who recommends the stock. "It's
misleading to think of Pfizer as the Viagra
company, because they have too many sizable
new products."
Those include Norvasc, the world's biggest-selling
drug for hypertension, and Celebrex, an
anti-arthritis medication launched in January that is
expected to take in more than $1 billion annually.
New York-based Pfizer also co-markets with
Warner-Lambert Co. the best-selling drug for
reducing cholesterol, Lipitor.
Based in Morris Plains, N.J., Warner-Lambert
has a successful diabetes drug, Rezulin and is
co-promoting a popular antidepressant, Celexa,
with Forest Labs. Though Warner-Lambert has
seen its shares drop by almost 9 percent in the last
year, PaineWebber's Chaffkin said he likes the
company's potential growth rate and has rated it a
"buy." The stock closed at $66.63 Friday; it stood
at $73.19 a year ago.
Other favorites among analysts include
Bristol-Myers Squibb, which has rebounded
from a one-year low of $44.16 Oct. 8. The stock
closed at $72.88 Friday, up more than 23 percent
from a year ago.
The company has several new drugs in its pipeline,
including Omapatrilat, a blood pressure reducer.
Len Yaffe, pharmaceutical analyst for Banc of
America Securities, called the drug a potential
blockbuster that could achieve sales in excess of
$1 billion annually. Bristol-Myers Squibb, one of
Yaffe's favorites along with Eli Lilly, already has
proven successes that include the cholesterol
reducer Pravachol and the anti-cancer drug Taxol.
Merck & Co.'s stock also has performed above
industry averages, up more than 14 percent during
the last year. The Whitehouse Station, N.J.-based
company is liked by PaineWebber's Chaffkin,
who said its potential blockbuster Vioxx, an
anti-arthritis medicine, gives it some leverage
against expiring patents. Five of the major drugs
sold by Merck, either directly or through joint
ventures, lose their patents in 2000 and 2001.
When patents expire
Expiring patents also will hurt other brand-name
drug manufacturers in coming years but might
benefit generic drugmakers, such as
Allegan-based Perrigo Co. and Detroit-based
Caraco Pharmaceutical Laboratories.
The two companies have struggled. Perrigo
announced in April it would cut up to 150 jobs to
trim costs and restore profits. Caraco has never
reported a profit in its 15-year existence and has
gone through extensive management overhauls.
The big brand-name drugmakers also might lose
some ground as employers and insurers pursue
plans to lower drug spending. Many health plans
have instituted structures that favor lower-cost
generic substitution. Others are educating doctors
about the wide price variations among
brand-name and generic drugs.
Despite the pressures that drugmakers face, Stire,
the financial planner, sees nothing but positive
results in the future.
"If someone wants something stable in their
portfolio, pharmaceuticals are a very, very good
bet," he said.
BOAZ HERZOG can be reached at
313-222-6731 or herzog@freepress.com.
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