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A Good Time to Buy into Health.

They're ailing--but the prognosis for a healthy recovery is good.

We're talking pharmaceutical stocks, an increasingly vital segment of the market as the global economy keeps expanding and the nation's populace grows older.

Simple math tells the story. By 2010, census takers expect the U.S. population to grow 10 percent to 298 million. But, significantly for drug companies, the portion of the population older than 50 will increase to 32.4 percent from the current 27 percent, upping the number of Americans over 50 from 73 million to 96 million.

Those statistics bode well for stocks bred of companies that provide the medicines that cure ailments as well as the pills that help prevent them. As consumers get older, they buy more and more preventive drugs, enabling them to live well into their senior years.

As the demand from the aging population increases, drug companies have turned to technology for answers. Technological advances now allow companies to test drugs far faster while at the same time conduct research into finding drugs to prevent diseases. For instance, Merck just 10 years ago was able to test about 30 compounds a day in the search for new drugs. But robotics and computers now do the job faster and with much greater efficiency than humans. Scientists at Merck tested about 250,000 compounds in the 60 years prior to technology entering the picture in 1994. Since then Merck has tested 4.5 million compounds.

Technology also has opened the door to genomics, the science of identifying and mapping genes. Genomics helps ferret out diseases at the molecular level, enabling researchers to identify targets for drug compounds to combat the diseases. Most major drug companies now work either alone or in joint ventures with small biotech firms to find the human gene sequence and patent the drug compound developed for specific genes.

That technology impacts the bottom line in another fashion, too. Patent expiration on drugs has always plagued the industry, providing competitors eventually with the fruits of a company's research efforts. Now, thanks to the speedier testing methods, pharmaceutical giants extend their patent protection by finding new uses for compounds while at the same time improving existing compounds. When a company can offer a consumer a different drug to better treat his or her ailment, it offsets the loss of revenue that occurs when the patent on the existing drug expires.

Merck's Zocor offers a prime example. Originally approved by the FDA to lower cholesterol, Zocor now has been judged helpful in reducing the risk of stroke. At Eli Lilly, Evista was first marketed as a drug to treat osteoporosis. But Lilly's researchers have continued to test the drug and studies now show it has the potential to reduce the risk of breast cancer.

Drug companies recognize the importance of constant research and development and many of them earmark a dedicated percentage of sales for R&D. They know that only about one of every 500 compounds discovered leads to a prescription drug. They know, too, that prescription drugs work only for about 50 to 70 percent of patients. But they also know that, according to health care information company IMS Health, approximately $308 billion was spent on prescription drugs worldwide in 1998, $90 billion of it in the U.S. IMS Health projects prescription drug sales in the U.S. to increase to $143 billion by 2002.

Given the demographic changes in the population, the technological advances of the pharmaceutical industry, and the historically low valuation premium of pharmaceutical stocks relative to the S&P, we strongly believe recent price declines present buying opportunities for the long-term investor, especially in the following companies:

* Bristol-Myers Squibb--Solidly entrenched in a variety of health-care fields, including prescription drugs, infant formula, and health and beauty aids. Lists among its product line Bufferin, Excedrin, Clairol Herbal Essences, Enfamil, Pranachol for cholesterol, and Taxol for cancer treatment. Spends 8.6 percent of sales on R&D.

* Eli Lilly & Co--Develops, manufactures, and markets pharmaceuticals with emphasis on central nervous disorders and diabetes. Sells such products as Prozac, Evista, and Zypreya in more than 120 countries. Worldwide sales represent 37 percent of business, with 18.5 percent of sales going to R&D.

* Merck & Co.--A leading manufacturer of pharmaceuticals and provider of prescription drug programs. Zocor, Cozaar, and Vioxx among its pharmaceuticals. Its international business represents 25 percent of pretax profits. Spends more than 6 percent of sales on R&D.

* Schering-Plough--Worldwide manufacturer of prescription and over-the-counter drugs, animal health products, and vision, sun, and foot-care lines. Lists among its brands Scholl's, Coppertone, and Claritin. R&D accounts for 12.5 percent of sales.

David Elias is president and chief investment officer of Elias Asset Management, a Williamsville, NY-based investment firm. Its affiliates, directors, or stockholders may have positions in or may purchase or sell securities mentioned in this column.
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Copyright 1999, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Elias, David
Publication:Chief Executive (U.S.)
Article Type:Brief Article
Geographic Code:1USA
Date:Dec 1, 1999
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