Market Place: Drug Issues Go From Champs to Chumps in a Few Weeks
By DAVID J. MORROW NY Times 1/22/99
Talk about a reversal of fortune.
After soaring 49.9 percent last year, the Standard & Poor's Drug Index, a bellwether of industry stocks, has become one of Wall Street's biggest chumps. Not only has the index trailed the anemic 0.48 percent gain of the Standard & Poor's 500-stock index so far this year, it has actually notched a negative 5.49 percent return.
If that's not troubling enough, even the rockets of the pharmaceutical industry have suddenly fallen to earth. Warner-Lambert, which notched an 81.7 percent gain last year, has a negative 10.9 percent return in 1999. And Pfizer -- remember Pfizer, several business magazines' choice for company of the year in 1998? -- now has a negative return of 6.8 percent, quite a turnaround from last year's 67.6 percent gain.
It's true, the year is still young, and three weeks of performance does not a year make. But the drug stocks' woes actually began in the fourth quarter last year. While the Standard & Poor's 500 roared ahead 20.9 percent, the S&P Drug Index gained only 13.95 percent.
What's behind the stall? Analysts blame the slowdown on several factors. Investors appear to be taking profits from drug holdings and moving them into other sectors, particularly those less expensive than drug stocks. Other investors appear to be leery about the industry's blockbuster drugs that can hurt a stock at the slightest mention of bad news.
Last year, investors appeared to have ignored the lofty price-to-earnings ratios of drug stocks -- Pfizer, for example, currently sells at 68.9 times earnings, compared with 32.6 times earnings for the S&P 500 -- but have now given the stock prices a second look.
After notching such huge returns, investors appear to be wondering just how long the gains can last. And given the recent potentially ominous headlines regarding some of the industry's most profitable drugs -- notably Prozac, Eli Lilly's ubiquitous anti-depressant, and Rezulin, Warner-Lambert's diabetes drug -- skittish investors, who have historically bought pharmaceutical stocks, are beginning to bail out.
"I sold all of my drug holdings around six months ago," said Ken Heebner, a fund manager at CGM Capital Management. "You just look around at the drug companies, and it's hard to believe that they are actually going to generate enough growth to justify the cost. There are just too many other investment alternatives out there."
The move away from drug stocks comes as pharmaceutical companies report their fourth-quarter and year-end earnings. Even though the results are expected to be strong -- Warner-Lambert is expected to report a 43 percent fourth-quarter gain next week -- most analysts do not expect the stock slide to halt immediately.
While it's common for investors to rotate the weight of their portfolio from one stock sector to another, analysts believe another phenomenon is hitting pharmaceuticals. The onslaught of initial offerings of several Internet stocks -- which sometimes more than triple in value in a day -- has created a microwave investing strategy, or, in other words, an instantaneous fortune.
Even though several drug stocks have produced large gains in a single year -- Schering-Plough, for example, went up 77.9 percent in 1998 -- that is way too slow for some investors. Drug stocks have historically delivered long-term consistent growth, a benefit that may have fallen out of vogue in today's market.
"The growth rates in the pharmaceutical industry are superior to that of many others," said Michael Mee, chief financial officer of Bristol-Myers Squibb, generally regarded among industry's most consistent performers. "To some investors, pharmaceutical companies may not be as attractive as the Internet stocks. But to invest in them, the money has to come from somewhere."
The drug companies, though, may have themselves to blame for some of their stock declines. Their use of consumer advertising to create brand loyalty has been remarkably successful, but it has added to the phenomenon of the blockbuster drug. All too often, some analysts believe, investors have come to associate a pharmaceutical company with only one drug and barter its stock based on the performance of that product.
Pfizer, for example, reported a 42 percent gain in operating income Tuesday, but the company's stock only increased 6.25 cents. The trouble: Viagra, the company's wildly popular anti-impotence pill, did not meet most analysts' expectations even though it had $788 million in worldwide sales.
Investors have become increasingly jittery about Lilly's patent battle with Barr Laboratories over Prozac and Warner-Lambert's upcoming meeting with the Food and Drug Administration over the safety of Rezulin, its popular diabetes drug. The anxiety has become so severe, analysts say, that investors have shied away from the entire pharmaceutical sector.
"A lot of these issues are making people nervous," said Ian Sanderson, a managing director at Cowen & Co. "Investors are looking around for cheaper stocks, but the smaller cap companies have been the big performers."
Still, an aggressive strategy may not be for all investors. Analysts are confident that drug stocks will become popular again, especially as they become cheaper.
"People invest in us for balanced, diversified strength," Mee said, noting that Bristol-Myers manufacturers 65 products that each have annual sales of $50 million or more. "Some of these people who are into the get-rich-quick routine may discover they get to go to the poor house first. I haven't heard of a single Bristol-Myers investor who bought shares to get rich overnight." |
