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Outlook for drug makers food as focus shifts to fundamentals.

NEW YORK - The vital signs of the pharmaceutical industry appear to be quite strong.

The chance for national health care reform in the United States has passed and along with it the fears that drug makers would see their revenues sharply limited. And widespread cost-cutting in the industry has helped turn profits around.

Although analysts think that the growth in Medicare and Medicaid spending will probably be slowed, they say the cutbacks will be considerably less than those originally proposed by the Republicans. Overall pharmaceutical industry earnings in 1996 should benefit from rising prices and an increasing stream of new products, many of which represent therapeutic breakthroughs.

Industry experts agree that the difference this year compared with 1995 is that "earnings growth will shift from cost cutting to fundamentals." That characterization, by Richard Vietor of Merrill Lynch, means the winners will be the firms with significant new products.

Less sanguine

Drug stocks were big gainers in 1995, but that above-average performance may not be repeated again this year. Value Line's pharmaceutical industry analyst George Rho says, "The group's earnings are likely to increase at an above-average rate this year as well, but we are less sanguine about prospects for its stocks. Our feeling is that much of the near-term opportunity in pharmaceutical shares has already been realized, with many issues presently trading at price-to-earnings multiples that are at the high end of historical valuation levels."

The sector also saw a wave of megamergers last year. Analysts think that the pace of consolidation is bound to slow in 1996. However, they say that the merger trend among pharmaceutical companies isn't over. So many industry watchers expect combinations to continue until only 10 or 15 giants are left. Prudential Securities drug analyst David Lippman notes, "Industry consolidation isn't complete, and it is possible that we will witness some truly enormous mergers that will create even stronger companies than are now visible in the industry."

Here is a brief rundown of the outlook for some of the major drug makers:

* Abbott Laboratories is a leader in health care products, including drugs, diagnostic tests, intravenous solutions, laboratory and hospital instruments, prepared infant formulas, and nutritional products. Its future is promising due to a Food and Drug Administration (FDA) panel's vote to recommend approval of Abbott's Biaxin, to be used in combination with Astra-Merck's Prilosec and Glaxo-Wellcome's Tritec to treat ulcers. Roughly 25 million Americans experience ulcers at some point during their lives.

Analysts believe that Abbott's drug Depakote, for the treatment of manic depression, will be a big winner, since it's the first medication in 25 years to gain FDA approval for the condition.

Also look for continued gains for Hytrin, for the treatment of benign enlargement of the prostate gland. It could generate $300 million in annual sales for the company.

* Amgen developes human therapeutic and diagnostic products, as well as animal health care and specialty chemicals, based on molecular biological techniques. Experts look for above-average sales gains for its two key products - Epogen, for treating anemia associated with chronic kidney failure, and Neupogen, which is used largely to boost white blood cell levels in cancer patients. The company recently secured the rights to Norcalcin, a hyperparathyroidism medication, which is expected to be a winner.

* Biogen, another biotechnology firm, should start seeing gains from sales of Avonex, which has won FDA approval as a safe and effective means of retarding the progression of multiple sclerosis. It could become the drug of choice for the over 500,000 MS patients worldwide.

* Bristol-Myers Squibb Co. should enjoy double-digit sales and earnings growth in the years ahead. Although patent protection on the company's Capoten, a cardiovascular medication, recently expired, there are other promising products in the pipeline. Look for strong sales of Taxol and Paraplatin, anticancer drugs, and Pravachol, a cholesterol-lowering agent, as well as of such new entries as Stadol NS, an analgesic, and Glucophage, a diabetes medication.

* Eli Lilly & Co. should have a good year as it gets a positive contribution from its PCS unit, which has given it a big stake in the expanding pharmacy benefits management business. Look for sales of Prozac, its dominant and still rapidly growing product, to hit $2.4 billion in 1996.

Lilly should also get some sales benefits from product introductions, but the amount is not likely to be substantial. Probable new drugs include Gemzar, for pancreatic cancer, and Humalog, a short-acting insulin. In addition, Zyprex, a treatment [TABULAR DATA OMITTED] for depression, is likely to be reviewed by an FDA advisory committee this year.

* Merck & Co. is benefiting from the penetration of its Medco managed care division into more major markets. Merck should experience favorable earnings momentum over the rest of the decade as a result of strong demand from the company's broad array of drugs.

Its leading product, Vasotec, is the world's largest-selling cardiovascular medication. Merck's other top medications include Mevacor and Zocor, both of which lower cholesterol, and Proscar, a prostate shrinking agent. Results have been promising for Cozaar, a new antihypertensive product.

The company's next $1 billion product could be Fosamax, an osteoporosis drug that hit the U.S. market in October 1995.

* Pfizer Inc. should stay on a roll from a steady stream of lucrative new products, coupled with cost savings from restructuring measures.

The company has developed an unmatched portfolio of six relatively new blockbuster medications. It includes Norvasc, a treatment for angina, hypertension and congestive heart failure; Cardura, a drug for cardiovascular problems; Diflucan, an antifungal agent; Zithromax, an anti-infective; Zoloft, a medication used to treat depression; and Glucotrol XL, a diabetes drug.

Experts report that Pfizer has one of the strongest lineups of products for a wide range of ailments going through clinical studies. The firm is expected to launch four medications from 1996 to 1998, including Zyrtec, a low-sedating antihistamine.

* Earnings at Pharmacia & Upjohn, which was created through a merger in November 1995, will be heavily influenced by the success of its cost- cutting efforts. All of the company's key drugs have either lost marketing exclusivity in the U.S. or will do so within the year.

But recent new products plus a number of other medications that are likely to win FDA approval shortly will probably start boosting sales and earnings in 1997. Caverject, for erectile dysfunction; Zinecard, which is used in chemotherapy; and Genotropin, a growth hormone, were introduced in the U.S. during the fourth quarter of 1995. Corvert injection for arrhythmias will be launched soon. And Rogaine, which addresses the problem of hair loss, recently won FDA approval as an over-the-counter product.

Here is an analysis of three top generic drug companies:

* Ivax Corp. offers a varied line of products. It recently received FDA approval to market albuterol, clearing the way to offer a generic version of Glaxo-Wellcome's Ventolin, an inhaled drug for treating asthma.

* Mylan Laboratories focuses primarily on antibiotic, anti-inflammatory, cardiovascular and central nervous system agents. With fewer name brand medications losing patent protection over the next 3 to 5 years, the company is looking elsewhere to expand its business.

Mylan should get a boost from the launch of captopril. The company also has about 19 other drugs, including three delivered via skin patches, at the FDA and should be helped by its expected acquisition of UDL Labs.

* Watson Pharmaceuticals is another top-tier generic drug maker with outstanding growth prospects. The company has generally sought to emphasize development of generics that face limited competition due to unique formulation or manufacturing challenges, as well as drugs with relatively small markets, as opposed to high-volume products.
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Title Annotation:1996 CDR State of the Industry Report
Publication:Chain Drug Review
Date:May 6, 1996
Previous Article:1995: the year in chain drug store retailing.
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