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Pharmaceutical industry profit growth moderates.

NEW YORK--What a difference a year makes. Only a year ago pharmaceutical industry stocks were the darlings of Wall Street. Drug firms were being hailed as one of the best examples of U.S. scientific prowess, and analysts believed that many of the firms could achieve 15% annual earnings growth, seemingly forever.

Those days are gone, for the time being. They've been replaced with President Bill Clinton and health reform czar Hillary Clinton.

Unlike the laissez-faire days of the Bush presidency, the Clinton administration is going to leave big footprints on the drug industry. Whether it's through health care reform, drug price controls or the suspension of tax benefits, investors believe the Clinton administration will prune the robust earnings growth rates of the big drug companies.

The future is now for the drug industry, since for the past year it has come under intense pricing pressure from such volume buyers as managed care plans. Clinton's health plan is expected to require managed care plans to provide outpatient drug coverage; that means a larger percentage of the major drug companies' sales will be exposed to discount demand buying.

Industry sources say that managed care sales, which represented about 35% of all prescription drug sales in the U.S. in 1989, grew to 64% of all sales in 1991 and are expected to rise to 75% of all sales in 1994.

Drug analysts believe the growth rate in prices will slow this year to from 3% to 5%, with or without federal regulation.

In addition, in an effort to preempt even more restrictive price regulations drug industry executives made some concessions to the Clinton administration on drug pricing. It has been reported that drug executives have agreed to develop a way to hold down annual increases in prescription drug prices and to have that plan monitored.

As a result, industry experts contacted by CDR now feel that annual drug industry profit growth, which had averaged 15% to 20% in 1987 to 1991, is moderating to the 9% to 12% range. It's expected to stay at that level for the next three to five years.

"It will be the survival of the fittest," says Salomon Bros. drug stock analyst Mariola Hagger. "We are definitely heading into the era of tight price controls. The strongest companies will simply have to prove that the skeptics wrong."

At this time, Hagger and other top analysts have their buy recommendations on several stocks. Analysts suggest that investors move away from firms that have to compete on price to those that can demand premium prices for unique medicines.

"Investors should look for firms that have a strong core business of patent-protected products," says PaineWebber Inc. drug analyst Ronald Nordmann. "Look for firms with increasing earnings through unit growth, not price increases."

Here's a brief rundown of the outlook for some major drug firms:

* Abbott Laboratories has strong positions in cost-effective pharmaceutical, nutritional, hospital and laboratory products. It should extend its enviable long-term record of sales and earnings growth. There has been strong worldwide acceptance of its new macrolide antibiotic Clarithromycin. Abbott's Lupron for treating female infertility should boost earnings.

* Alza Corp., the leader in controlled release therapeutic drug delivery systems, should continue to benefit from a rising stream of royalties from licensees using its delivery systems as well as increasing sales of its own proprietary drugs.

* American Home Products Corp., a leading producer of prescriptions and O-T-Cs, hospital supplies and food products, should resume its long-term earnings growth record during 1993. The company should benefit from the distribution of Norplant contraceptive. Lodine, an anti-inflammatory analgesic, should also be a winner.

* Bristol-Myers Squibb Co., one of the world's largest pharmaceutical firms, should enjoy double-digit earnings growth in the years ahead, aided by new drugs and benefits from recent restructuring moves. Its new drugs include Pravachol, Monopril and Videx. In five years the company will no longer need the rare Pacific yew tree to make the drug Taxol, an anticancer agent. Recently the Food and Drug Administration approved one of the firm's estrogen products to treat osteoporosis and d4T for AIDS.

* Glaxo Inc. has brighter prospects as a result of growing contributions from such new therapeutic products as its Imigran for treating migraines, Zofran (an antinausea medication) and asthma drug Serevent.

* Johnson & Johnson offers one of the largest and most comprehensive rosters of medical products. J&J continues to spend heavily on research to fuel future growth. Promising products that showed strong growth include: Procrit, an antianemia drug; Floxin, an anti-infective; Vascor, a cardiovascular drug; and Monistat, an over-the-counter remedy for yeast infections.

* Eli Lilly & Co. will eventually be helped by product introductions. Its near-term prospects are clouded by problems including 1992's loss of patent protection of Ceclor (its leading antibiotic) and growing competition for its best-selling yet controversial antidepressant, Prozac. Nonetheless, Lilly has growth opportunities: liquid Prozac, Lovan for obesity control and Lorabid (an antibiotic).

* Marion Merrell Dow Inc. is expected to see its earnings prospects restricted as a result of generics inroads into some of its key drug lines that have gone off patent or are about to go off. Over the long term, however, earnings will benefit from Seldane-D, Cardizem in a daily dosage, Nicoderm transdermal patches and Targocid (an antibiotic).

* Merck & Co. has spawned many new drugs from its massive R&D program, which should continue to be its principal source of growth. Proscar for reducing enlarged prostates and improving urine flow has recently come to market. Vasotec, Prinivil, Pepcid, Prilosec, Mevacor and Zocor all cholesterol-lowering agents, will continue to fuel results. In addition, a new drug now undergoing

FDA testing, Trusopt, looks promising for the eye disease glaucoma.

* Pfizer Inc. has perhaps the strongest new drug lineup in the industry. As a result, the firm should show sustained strong earnings growth over the course of the next few years. Among its new products that are selling well are: Procardia XL, a cardiovascular drug; Diflucan, an antifungal agent for AIDS victims; Cardura, an antihypertensive; Zoloft, an antidepressant; Zithromax, an antibiotic; and Norvasc, a new cardiovascular drug for both angina and hypertension.

* Schering-Plough Corp. has strong positions in growing markets and has placed an emphasis on drug development. Its products to watch are alpha-2 interferon (an anticancer and antiviral therapy), Eulexin for prostate cancer, Intron-A, and Proventil asthma drugs. Leucomax, which stimulates white blood cell production for AIDS victims, will go on sale this year.

* Syntex's earnings outlook is clouded by patent expirations of its key Naprosyn and Anaprox antiarthritic drugs in December 1993. The firm shows promise in Cardene (a calcium-channel blocker), Cytovene for treating an eye disease tied to AIDS, Toradol (an analgesic) and Synarel for endometriosis.

* Warner-Lambert Co. will reap the benefits of major restructuring steps it has taken in recent years. Growth in its pharmaceutical sector will be led by its new transdermal nicotine patch (Nicotrol), the cardiovascular medications Accupril and Dilzem, the analgesic Ponstel and Capsugel capsules.

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Title Annotation:The State of the Industry; Special Double Issue
Publication:Chain Drug Review
Article Type:Industry Overview
Date:Apr 26, 1993
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