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Pharmaceutical manufacturers enjoy strong earnings.

NEW York - Manufacturers of brand-name pharmaceutical products should continue to enjoy uninterrupted above-average earnings growth for the foreseeable future, in spite of the sluggish economy, increasing competition from generics makers and recent restrictions on prices paid by Medicaid.

Analysts are convinced that the drug industry will remain one of the country's fastest-growing sectors. At the same time, they say, it will be able to maintain its rock-solid financial underpinnings.

"With the economy still in a rut and with major impediments to a meaningful near-term recovery still in place, we think that drug stocks will return to favor on Wall Street as investors consider the safe-haven characteristics and superior earnings growth rate of the group," says Value Line analyst Rudolph Carryl. "Indeed, we estimate that industry-wide profits will advance 20% this year, compared with a gain of 6% to 8% for corporate America on the whole. A similar gain in profits is likely in 1993."

Fueling drug makers' bottom-line rise in 1992 will be the flow of high-margin, niche-oriented therapeutic substances and the rising demand from elderly Americans.

The over-60 segment of the population (which is afflicted the most by chronic illnesses) uses nearly three times as much medication as younger groups. The swiftly growing number of senior citizens should continue to spur demand in the industry's most lucrative fields, including cardiovascular problems, central nervous system disorders, arthritis and infectious diseases.

Benefits from low taxes

Drug industry results also should benefit from low tax rates, share repurchase programs, and recent restructuring that eliminated some low-margin operations.

Of course, health care reform and the emphasis on cost containment are hot political issues in the current presidential election year. At this point, specific proposals on a national scale are expected to be approved this year.

The more cost-conscious medical marketplace that is evolving during the 1990s will present major challenges for the pharmaceutical sector, since it's likely to encompass a bit of gradual erosion of its long-cherished pricing flexibility. Some leading drug makers have begun to limit price increases voluntarily to the general rate of inflation. Nevertheless, as more price controls are put on drugs, it could provide opportunities for those firms with well-stocked research and development pipelines.

"While more cost-consciousness will probably limit pricing on established pharmaceuticals, innovative therapeutic breakthroughs will be rewarded with new markets and relative pricing freedom," says Standard & Poor's Corp. analyst Herman Saftlas. "Examples of such products are: Glaxo Inc.'s Imigran treatment for migraine headaches and Merck & Co.'s Proscar to reduce enlarged prostates."

In the past 12 years drug stocks have outperformed the overall market in every year except 1980 and 1983 - economic recovery periods, in which drug issues were preempted by cyclical stocks. Despite drug issues' slow start so far, industry analysts believe that 1992 will probably shape up as yet another strong year for these stocks.

Investors in drug companies look for three main attributes for success: innovative drug discoveries, efficient drug development and effective marketing. If a company can implement these on a worldwide scale, it has the recipe for strong growth and big stock market gains. The following companies meet these criteria.

Merck is expected to retain its industry leading position, as a result of its strength in research and marketing. Solid sales and earnings gains will be led by high blood pressure drugs Vasotec, Vaseretic and Prinivil; cholesterol lowering agents Mevacor and Zocor; ulcer treatment Pepcid; and Prilosec, a gastrointestinal drug. And Merck has debuted Plendil for high blood pressure.

Bristol-Myers Squibb Co. is still reaping benefits from its $11.5 billion merger with Squibb in 1989, which should contribute to an 18% rise in earnings this year. Its new products include Pravachol (a cholesterol lowering agent) and Videx (a promising AIDS treatment). Much potential is seen for the company's new Taxol anticancer drug.

Pfizer Inc. may have the strongest list of blockbuster products coming to the market in 1992. Among these are Zoloft (an antidepressant) and Zithromax (an antibiotic). In addition, Novasc (a cardiovascular drug), Reactine (an antihistamine) and E5 (an antisepsis treatment) are likely to be approved by the Food and Drug Administration during 1992's second half.

SmithKline Beecham PLC also has a promising lineup of new pharmaceuticals and an improved financial condition. Its recent new drug releases include Relafen, an anti-arthritis compound; Seroxat, an antidepressant; Kytril, an antinausea agent; Havrix, the world's first hepatitis A vaccine; and Paxil, a Prozac-like drug for depression.

Syntex has stepped up its pace of product development in anticipation of the patent expiration of Naprosyn and Anaprox at the end of 1993. Important new products include Toradol, a potent nonnarcotic analgesic; Cardene, a calcium channel blocker; Cytovene, an antiviral therapy; Synarel, a treatment for endometriosis; and Ticlid, an antistroke drug that received FDA approval last December.

Glaxo has a strong list of new products coming from its research and development program funded by the profits from Zantac, the world's top-selling medicine. New products that are expected to fuel growth are Zofran, an antinausea treatment; Imigran, a treatment for migraines; and Serevent, an asthma medication.

The generic portion of the drug industry is set for a comeback after recent problems.

The FDA is beginning to loosen the spigot on the pipeline for generic drugs. In the near term the FDA will accelerate the number of off-patent forms of drugs it approves. The new entries should improve the pricing environment and generate incremental business.

In addition, over the course of the next few years many widely accepted medications will lose patent protection. Mylan Pharmaceuticals Inc. is one of the leaders among generics manufacturers, as well as a favorite of many drug analysts. Soon look for Mylan to add Danafete, a copy of Merrell Dow Pharmaceuticals Inc.'s anitulcer medicine Carafate.
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Publication:Chain Drug Review
Date:Apr 20, 1992
Words:955
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