Big Pharma's Pick-Me-Up: A Down Dollar

S&P's Herman Saftlas is upbeat about a brace of drug stocks, while colleague Frank DiLorenzo sees smaller gains for biotechs

Pharmaceutical stocks should hold up well this year as earnings improve, thanks to new-product launches and the weaker dollar, says Herman Saftlas, who follows the industry for Standard & Poor's. Biotech stocks, though, have already had a good run this year and aren't likely to be as strong in the remainder of the year, according to S&P's biotech analyst Frank DiLorenzo.

These were among the points Saftlas and DiLorenzo made in an investing chat presented May 13 by BusinessWeek Online and Standard & Poor's on America Online. They were replying to questions from the audience and from Karyn McCormack of BW Online. Following are edited excerpts from that chat. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.

Note: Herman Saftlas and Frank DiLorenzo are equity analysts at Standard & Poor's. They have no ownership interests in or affiliation with any of the companies that are under discussion today. Other parts of Standard & Poor's may have a relationship with companies that are under discussion. They are registered representatives of Standard & Poor's Securities.

Q: Herman, what are some of your favorite pharmaceuticals stocks, ranked 5-STARS (strong buy), right now?


: My 5-STARS are Pfizer (PFE ), Barr Laboratories (BRL ), and Teva Pharmaceuticals (TEVA ). Pfizer we see as one of the strongest growers in terms of earnings, with the largest and most diverse drug portfolio and also the strongest research and development pipeline and cost savings from the [Pharmacia] merger. Its diverse pipeline means it's less dependent on one single product -- much less so than any other pharmaceutical company.

Barr Laboratories is one of the most efficient generic-drug companies, with a strong pipeline of new products. Also, it's valued favorably relative to its peers. Teva is the world's largest generic pharmaceutical company, and it also has a growing branded business in treatments for multiple sclerosis and Parkinson's disease.

Q: What's your opinion on Johnson & Johnson (JNJ )?


: JNJ we rate as an accumulate. It now has a monopoly on the drug-coated stent in the U.S., and that should be close to a $2 billion business in the next 12 months. Their drug business is also going to grow, although recently they've had some setbacks in the Eprex Procrit line. JNJ is well-balanced in consumer products and other medical business.

Q: Frank, what are your top-ranked biotech stocks?


: We have 5-STAR ratings on Amgen (AMGN ), Gillead Sciences (GILD ), and MedImmune (MEDI ). For all three companies, we expect very strong earnings-per-share growth over the next three to five years. We still think they're reasonably priced based on our valuation techniques.

Q: Opinion on Abbott Labs (ABT )?


: Abbott Labs we have as a hold. It's benefiting from a strong launch of its Humira drug for rheumatoid arthritis, but they have to share profits on that drug from the company they license it from. Plus, their diagnostic business is still hurting, and they face some generic threats. The shares are adequately valued.

Q: What do you think of generic-drug companies in general?


: I think prospects are good for generics. Both from a product standpoint, with many patent expirations, and there is also the possibility of more favorable legislation from Washington.

Q: Where does the legislation regarding generics stand now?


: There was a lot of noise about the changes in the Hatch-Waxman Bill last fall, but it has sort of quieted down with the Iraq war and other foreign developments. It will probably be resurrected during the next major election. By the way, President Bush did come out with a proposal to cut back on some of the so-called abuses that branded companies use to extend patents.

Q: What's your opinion of Millennium Pharmaceuticals (MLNM ) and Genentech (DNA )?


: For MLNM we have an accumulate ranking, but we consider it speculative because it's a very risky stock. The primary story there is an experimental treatment for cancer called Velcade. Right now, it's being reviewed by the Food & Drug Administration for treatment of multiple myeloma. We think the drug could potentially be approved in the third quarter of 2003, and our rating is predicated on approval and a successful launch. [Note: The FDA approved Velcade on May 14.] However, the company's spend rate on R&D is overly high in our opinion.

Regarding Genentech, we have a hold on the stock. We think it's a very solid company. And we believe Xolair, for allergic asthma, could be approved this year. The main reason we have a hold on it is because we feel on a valuation basis that it is pricey in relation to a number of its peers, such as Amgen, Genzyme (GENZ ), and MedImmune. [Genzyme is ranked accumulate.]

Q: How about Forest Labs (FRX )?


: We continue to recommend that stock as an accumulate. Despite the minor setback in R&D, we still feel that they have the strongest growing antidepressant franchise, and we still see significant potential for their experimental Alzheimer's drug.

Q: Any comment on Schering-Plough (SGP )?


: Yes, today they reported earnings, which the actual earnings were a little better than expected, but the bad news was they withdrew their estimates for 2003, the full year. They do face a lot of uncertainties with respect to their Intron franchise. We have a sell on that stock.

Q: What's your favorite mid-cap health-care, drug, or biotech stock?


: We have 5-STARS ratings on Gilead Sciences and MedImmune -- the closest things we have to midcap-size stocks. Barr Labs is a midcap also.

Q: Frank, biotech stocks have already had a big run this year, up some 20% as measured by the S&P Biotech index through May 9. Do you think the group can continue climbing?


: I would say that we see some additional upside, but we don't expect the entire sector to run up as well as it did in the first half.

Q: What are the most promising treatments being developed by biotech now?


: The main focus of the sector is in the area of cancer, and there's also a big focus in inflammation. I think an area where there is some hope is psoriasis, where we think Embrel will do well.

In cancer, there are some promising treatments, but we don't really see any breakthroughs. Aside from that, we would say that Xolair could be an important drug in the area of asthma.

Q: Any thoughts on Novartis (NVS )?


: Novartis is a stock that we have a hold on. It's got a very nice product portfolio, very broad-based. Their pipeline is also decent. It's one of the largest European drug companies. There is a long list of drugs that I could talk about, but their lineup and pipeline are both very good.

Q: Herman, how do you think pharma stocks will perform the rest of the year? The group is up almost 6% so far.


: I see the group holding up pretty well over the balance of the year. I think the earnings are looking a little better, helped by the weaker dollar and some new product launches.

Edited by Karyn McCormack

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