January 13, 1999 Drug Stocks May Not Be Seen As Haven In Troubled Mkt
By Raymond Hennessey
NEW YORK (Dow Jones)--Large-capitalization drug stocks might not be the haven amid this newest market downturn that they have been in past times of market volatility, analysts said.
Traditionally, during market downturns, investors pour money into big-name pharmaceutical companies like Pfizer Inc. (PFE) and Merck & Co. (MRK) because of their predictable earnings stream and isolation from emerging markets.
But investors may not be so quick to turn to the drug companies from the downturn brought on Wednesday by the resignation of Gustavo Franco, Brazil's central bank chief, and the widening of the band in which the Brazilian real trades against the dollar.
For one thing, the drug companies have been victims of their own success, with valuations much higher than they have been in the past, said Hemant Shah, an analyst with HKS & Co.
"They may decline a little less than the broader market, but they're clearly not the safe haven they would have been if their valuations were not so high," Shah said.
At the end of 1998, the major drug companies were trading at about 34 times their 1999 earnings estimates, while the S&P 500 averaged 25.9 times forward earnings, said Neil Sweig, an analyst with Southeast Research Partners.
There has been some profit-taking in the beginning of 1999, Sweig said, and that could continue through the rest of this month as the stocks suffer from their own "January effect." Portfolio managers generally sell their drug stocks after the first of the year to take profits and evaluate some of the trends in the industry before returning to the stocks, Sweig said.
What further hurts the stocks is the source of the latest economic worries: Brazil. "Brazil is very important to many U.S.-based companies, including the drug companies," Sweig said.
Drug stocks were mixed Wednesday. Pfizer was up 1 3/4 or 1.5%, to 115 7/16. Eli Lilly & Co. (LLY) traded up 3 3/4, or 4.9%, to 80 1/4. Warner-Lambert Co. (WLA) edged 1/8, 0.2%, higher to 69 7/8. Pharmacia & Upjohn Inc. (PNU) were up 1 5/16, or 2.5%, to 54 1/4.
Trading down were Merck, off 13/16, or 0.5%, to 147 1/8, and Bristol-Myers Squibb Co. (BMY), off 1 5/8, or 1.3%, to 127.
Johnson & Johnson (JNJ) was also down, shedding 1 1/16, or 1.3%, to 78 3/4, while Glaxo Wellcome PLC's (GLX) ADRs were off 1/2 or 0.7%, to 70 1/4.
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