Drug Stocks on the Mend

Healthy pipelines and fewer patent expirations spell relief.

After the giant headache that was 2002, drug stocks should perk up in 2003. Pharmaceutical profits and share prices languished this year as a spate of big-name drugs lost patent protection and fell prey to generics. But in 2003, comparisons of earnings and sales growth will become easier, and patent expirations will let up. Meanwhile, new products are in the pipeline.

So this could be your chance to scoop up shares of large, high-quality pharmaceutical companies that were much pricier a couple of years ago, says J.C. Waller, co-manager for Icon Healthcare Fund.

Pfizer Inc. (PFE ) is one. It traded at a hefty trailing price-to-earnings ratio of 54 in June, 2000, as it acquired rival drugmaker Warner-Lambert Co. Waller calls it a bargain at 17, based on earnings projections for fiscal 2003. The maker of such hot drugs as Viagra and Lipitor (to lower cholesterol) will reap efficiencies through its planned acquisition of Pharmacia (PHA ), adds Stephen M. Scala, a pharmaceutical analyst at SG Cowen Securities Corp. Both companies excel at developing new products. Plus, they have many profitable drugs with years left on their patents.

Medicis Pharmaceutical Corp. (MRX ) is another Waller pick. The stock trades at 19 times next year's earnings, and Waller predicts 16% average annualized earnings growth over the next three years. Waller says the $212.8 billion company, which makes a variety of treatments for skin problems, has plenty of cash--$589 million as of Sept. 30--and does a good job of controlling costs, with a 39.7% operating profit margin.

Samuel Isaly, who manages the Eaton Vance Worldwide Health Sciences Fund, likes Novartis (NVS ), the Swiss maker of Neoral/Sandimmun, a drug to prevent transplant rejection, and Diovan/Co-Diovan, for high blood pressure. Despite a modest p-e of 18 for this stock, the company--whose American Depositary Receipts trade on the New York Stock Exchange--should see earnings and sales growth of 10% to 12%, he says.

Serono (SRA ), another Swiss company with ADRs, is a pricier Isaly choice, with a p-e of 21. But Isaly points to popular products, such as Gonal-F, a fertility drug, and Rebif, a treatment for multiple sclerosis, and predicts that Serono will see average annual profit growth of 15% to 20% in the next five years.

Then there's Amgen Inc. (AMGN ), the big drug/biotech company Isaly calls "the stock for the decade." Amgen trades at a p-e level of 29, down from 77 in July, 2000. For this, you get blockbuster drugs Epogen (which stimulates production of red blood cells) and Neupogen (white blood cells), plus a pipeline set to deliver other such products soon.

Scala adds Eli Lilly & Co. (LLY ) to the shopping list. Selling at a 24 p-e, Lilly hasn't been beaten down as much as other drug stocks. Its pipeline is rich, with as many as five new products expected to hit the market in 2003--including Cialis, a Viagra competitor.

Technological advances, along with America's aging population and rising incomes, are important for sparking sales. The coming year should bring a strong marquee of new drugs to boost profits and bring out the stock-buying public.

By Carol Marie Cropper

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