I am long and I think that with short-term legal issues priced in, this seems a very good entry point for those considering long-term performance. Dow put out this commentary on the sector in general, it looks bearish short term, but again I think these issues are already discounted in the price. The long-term sentiments are pretty bullish IMO -- implication is that the Nicotine patch issues are expected to be more of a "brief hurdle" (albeit an expensive one!) than a long term problem, and comments on upcoming patent expirations should be bullish for the segment in general.
Chris
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DJ Generic-Drug Cos. To Post Mixed Earnings As Prices Erode
By Melanie Trottman
NEW YORK (Dow Jones)--Generic-drug makers will face tough year-over-year comparisons in third quarter earnings as some erosion of last year's hefty price increases trickles down to the bottom line.
"There's going to be a mixed picture as far as earnings," said Gruntal & Co. analyst David Saks.
That picture will include virtually flat year-over-year earnings at some companies, and double-digit increases at others whose comparisons will be made easier because of various hardships last year. One company, Mylan Laboratories Inc. (MYL), will report an earnings drop, analysts expect.
Dubbed the price uptrend leader, Mylan is feeling a more severe impact from the price deterioration; its lorazepam and clorazepate drugs are two of a select group of high-volume high-profile products that have been under "considerable pressure," said SG Cowen & Co. analyst Ian Sanderson.
Hemant Shah, an independent analyst with HKS & Co., likened last year's price increases to the airline industry. "One raised prices, others followed," he said.
But a reversal of that trend began after the Federal Trade Commission started a probe of generic-drug pricing. The investigation had led to an antitrust lawsuit against Mylan alleging the company boosted drug prices after entering an exclusive deal with a materials provider. The FTC probe has put a damper on the industry, causing pricing pressure in the second quarter that continued in the third, analysts said.
In some cases, drug makers have slashed prices in response to wholesaler requests for more competitive contracts. But the pricing erosion, while stiff, is nowhere close to what the industry saw in 1987, when plunging prices severely hurt the group.
Mylan's earnings will drop to 28 cents from 30 cents a year ago for the company's second fiscal quarter ended in September, according to a consensus estimate of analysts surveyed by First Call/Thomson Financial. SG Cowen's Sanderson estimates the drugs lorazepam and clorazepate will contribute only half of what they did to earnings a year earlier. The Pittsburgh company has also been hampered by legal costs, he noted.
A sharp boost in research and development spending dragged down earnings at Barr Laboratories Inc. (BRL), said Saks, who lowered his estimates for the company several weeks ago. First Call expects earnings in the company's first fiscal quarter ended in September to be flat with the year-earlier 48 cents. But several analysts, including Saks, see a higher number of 50 cents. The Pomona, N.Y., company has seen pricing pressure on its generic version of the antistroke drug Warfarin, but its rising market share is offsetting the squeeze, Shah said.
A warning about Watson Pharmaceutical Inc.'s (WPI) earnings was issued in August, when the company said as much as 6 to 7 cents a share would be shaved from the third quarter. Watson cited a court injunction requiring it to recall a new nicotine gum product pending resolution of a lawsuit filed by pharmaceutical drug maker SmithKline Beecham PLC (SBH). Earnings will be nearly flat with a year ago, at 38 cents a share compared with 37 cents, First Call estimates. The Corona, Calif., company's earnings should improve after the product is relaunched, Saks said.
Other generic-drug companies, including Alpharma Inc. (ALO), Teva Pharmaceutical Industries (TEVA), Schein Pharmaceutical Inc. (SHP) and Ivax Corp. (IVX), will report more substantial year-over-year increases, although in some cases the gains will appear overinflated because of comparisons with particularly troubling quarters last year.
Schein last year encountered regulatory issues when the Food and Drug Administration seized products at a company unit, citing failed manufacturing consistency. After relaunching certain products, Schein faced added recalls at another site. "They should have a decent quarter but they're still not out of the woods in terms of rectifying their problem," Saks said.
Still, Schein is on the way to recovery and earnings should show improvement, analysts said. Sanderson attributes the improvement primarily to the injectable iron product INFeD, a major drug for Schein that returned to the market earlier this year after being recalled. He expects the Florham Park, N.J., company to earn 12 cents in the third quarter while Saks expects 15 cents, compared with 5 cents a year earlier. First Call's estimate is higher, at 16 cents.
Ivax's comparisons will also be made easier because of improvements in its U.S. generics business, which was losing money last year, Shah said. He addded that the company's operations in Europe are doing "quite well." Ivax has also eliminated manufacturing inefficiencies and reduced debt, Saks noted.
Teva suffered last year when the Israel-based company experienced major price competition on a key drug. This year, the company is gaining sales from its relatively new multiple sclerosis drug, Copaxone. Earnings in this year's third quarter will rise to 56 cents from 41 cents a year earlier, First Call expects.
At Alpharma Inc. (ALO), synergy savings, particularly in Europe, will help drive earnings to 36 cents a share from 28 cents a year earlier, according to First Call. The European generic-drug market is doing well and Alpharma is benefiting from its exposure there. In June, the Fort Lee, N.J., company acquired a German generics business that should add to sales, Sanderson said. The company has also managed to escape some of the pricing pressure in the U.S. because it markets niche products here.
A boon to the industry going forward, analysts said, should be upcoming patent expirations in the pharmaceutical sector. Those expirations begin next year.
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