Drug Stocks Seen Having Second Stellar Year: Medical Market
Bloomberg News
January 13, 1999, 6:03 a.m. ET
Drug Stocks Seen Having Second Stellar Year: Medical Market
London, Jan. 13 (Bloomberg) -- Analysts are forecasting
another stellar year for drug industry stock performance, fueled
by a strong U.S. drug market, though some investors are holding
back pouring more money on the sector.
A combination of healthy earnings growth, strong new product
sales, the failure of so-called ''managed care'' to rein in drug
costs and a diversion of cash from faltering Asian markets will
all conspire to push share prices forward this year, market
specialists say. Furthermore, they say the merger and acquisition
trend of the last few years is not over.
''Drugs stocks had a great year in 1997 and there is no
particular reason that 1998 will be worse,'' said Genghis Lloyd
Harris, a Credit Suisse First Boston pharmaceuticals analyst.
It's hard to see how major drug and healthcare stocks could
have performed much better in the last year.
While the Standard & Poors 500 index gained 31 percent in
1997, the 15-stock Amex pharmaceutical index surged 49 percent
last year. The 30-stock S&P healthcare index, which includes some
of the same stocks, pushed ahead 42 percent during the year.
Other markets echoed those gains. In London, the FTSE
pharmaceutical index, which includes industry giants Glaxo
Wellcome Plc, SmithKline Beecham Plc and Zeneca Group Plc,
motored ahead 46.5 percent during 1997, compared to a 26.5
percent gain for the overall FTSE-100 index. The 22-member Swiss
market index leaped 59 percent in 1997, led by top drugmakers
Novartis AG and Roche Holding AG.
All benefited from a surging drug market in the U.S., where
sales were up 12 percent to $69.4 billion in the first nine
months of 1997 compared with the year earlier, said IMS America,
drug industry consultants.
IMS said it expects similar performance for the full 1997
year, which would make it the second straight year of double-
digit sales growth in the U.S. pharmaceutical industry, where one
third of all the world's drugs are sold.
Some Caution
While analysts tout bright prospects for drug stocks, some
investors aren't buying, cautious that optimism may fade after
the so-called ''January effect'' wears off. Asian economic
troubles, they say, could hurt drug company sales.
''The sector is pretty fully valued for growth prospects,''
said Nick Ross, fund manager with Electra Fleming Investment
Trust. ''There's just not a lot of upside left.''
John Hatherly, head of research of M&G Group Plc, a major
U.K. fund with drug stock holdings in Britain, Europe and the
U.S., was equally reticent.
''We are up to our weighting or slightly below in drug
stocks,'' said Hatherly. ''They have performed very well, but we
are a little cautious.''
Analysts say one key reason for growth in the U.S. market is
a new physician and consumer backlash against the health
maintenance organizations that now provide pre-paid care for a
growing majority of U.S. patients. Another is skyrocketing growth
of new drugs to treat depression, obesity, heart disease, AIDS
and others.
Once viewed as a serious threat to drug industry profits,
HMOs have now become low-cost marketing avenues through which
drugmakers can reach millions of patients, fueled by advertising
campaigns directly to patients. This has put new pressure on HMOs
to buy the latest, expensive medicines for their patients rather
than cheaper, older medicines.
''Despite their rhetoric to the contrary, we see little
evidence that managed care organizations have been successful in
reducing spending on pharmaceuticals,'' said Bear Stearns analyst
Scott Shevick in a recent report. ''Consumer resistance to
efforts to restrict healthcare services remains stiff.''
Price Increases
HMO spending and new drugs has allowed the industry to raise
prices by nearly 5 percent in the U.S. in the latter half of
1997, excluding discounting, Shevick said, fueling a surge in
operating profits for major drugmakers.
Fat price rises haven't always been the norm. During the
industry slump in the early 1990s, prices were generally
unchanged or lower in the U.S. In Europe and Japan, the second
and third biggest drug markets, pharmaceutical companies fared
worse as cash-strapped government buyers regularly slashed drug
reimbursement levels.
Faced with rising research costs, higher regulatory demands,
and a price throttle from the newly empowered health maintenance
organizations, drugmakers were then forced into a wave of
consolidation that created Glaxo Wellcome Plc, Pharmacia & Upjohn
Co., Hoechst Marion Roussel, Novartis and a raft of other
combined companies.
Last year, major mergers were fewer but moves towards
industry consolidation continued as drugmakers prepare to face a
raft of major drug patent expirations expected in the next four
years. The value of major transactions dropped from $34.7 billion
in 1995 to $12 billion in 1996, but surged again to $31 billion
in the first 10 months of 1997, according to HSBC James Capel,
with a major chunk last year from the $11 billion purchase of
Boehringer Mannheim by Roche.
Industry reorganization is expected to continue in 1998,
particularly in Europe. Some fund managers say that's the key
reason to invest in drug stocks, not analysts' rosy projections.
''I think there's going to be more than a bit of
restructuring coming through,'' said Sheila Bates, a fund manager
for Equitable Life Assurance Society, a major U.K. fund. ''We're
still positive on European pharmaceutical stocks.''
--Dane Hamilton in the London newsroom (44-171) 330-7727/js
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