February 2005  Email this  Print this
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STOCKS
Three Drug Stocks Ripe for Recovery
Drug companies are the Washington Redskins of the stock market. Both have gone from winning traditions to whipping boys in their respective arenas. It's too early to predict how the underachieving Redskins will fare next season, but it's clear that, given a few breaks, drug stocks have the potential to go on the offensive in 2005. Few groups have been sacked more often than the big drug companies in the past few years: New blockbuster medicines have been scarce, patents on key drugs have expired, the Vioxx debacle hit Merck, and Pfizer disclosed increased risk of heart attack when its anti-inflammatory drug Celebrex is taken at up to four times the normal dose for an extended period. Between January 2002 and early December 2004, the Amex Pharmaceutical index fell 20%, while Standard & Poor's 500-stock index gained 3%.
The sector's losing record may now be its biggest asset. Based on projected 2005 earnings, the price-earnings ratios of most big drug-company stocks are below that of the S&P 500 (now 17). Drug P/Es have historically dwarfed the market's. And like the Redskins, who have the biggest payroll in the NFL, big drug companies hold a lot of cash. The average dividend yield of six major domestic drug stocks is 3.1%, versus 1.7% for the S&P.
The bargain bin is filled with drug companies. Start with Bristol-Myers Squibb (BMY), a cheap stock with a kicker. At $24, Bristol sells at 17 times the average of analysts' earnings estimates of $1.40 per share for 2005. The kicker is Bristol's 4.7% dividend yield, among the highest in the sector and more than the yield on a ten-year Treasury note. In recent years, Bristol has lost patent protection on such high-profile drugs as Taxol and BuSpar. But the company currently has a solid roster of patented drugs, including cholesterol fighter Pravachol and cancer medication Erbitux. Bristol's pipeline of new products includes Muraglitazar, for diabetes, and Entecavir, to treat hepatitis B.
Shares of Eli Lilly (LLY) took a hit in December when the company announced that it had strengthened the warning label on Strattera, its medicine for attention-deficit disorder. At $55, down from $77 last spring, the stock sells at 18 times estimated 2005 profits of $3.10 per share. That's a reasonable price for a company with an excellent base of recently approved products -- such as Cymbalta, to treat depression; Alimta, for non-small cell lung cancer; and Cialis, for erectile dysfunction -- as well as a number of promising drugs in the testing phase. Among medicines expected to be in mid- to late-stage development in 2005 are drugs for diabetes, Alzheimer's disease, and brain and other forms of cancer.
Although Schering-Plough (SGP) now looks like a third-string player, it has turnaround potential. The company lost $92 million and cut its dividend in 2003. It paid a large fine for violating manufacturing regulations, and the costs of upgrading its plants are pinching profits. But the outlook isn't entirely bleak. Schering has introduced two cholesterol drugs, Zetia and Vytorin. It also sells, along with Bayer, the erectile-dysfunction drug Levitra. Given that expectations are so low, any positive development should pump up the stock, recently $19. Analysts see Schering earning 24 cents a share in 2005, but Lehman Brothers thinks Vytorin could boost profits to 30 cents. Also, some analysts are banking on CEO Fred Hassan, who joined Schering in 2003 after turning around Pharmacia & Upjohn.
--Maxwell Meyers |
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MAGAZINE
