Big Pharma Stocks Aren't Playing Defense

Friday June 13, 7:07 pm ET Vance Cariaga
A weak economy and volatile stock market usually send investors fleeing to safe havens, where the profits are steady and the share prices don't hop around too much.
Drug stocks used to fill that role, but not this year. Most Big Pharma stocks are getting beaten down, and a few recently hit their lowest point 14 years.
On Friday, Merck (NYSE:MRK - News) hit a two-year low of 34.92 intraday, a day after Bristol-Myers Squibb (NYSE:BMY - News) hit a six-year low of 19.59. On Wednesday, the world's biggest drug maker, Pfizer (NYSE:PFE - News), bottomed out at 17.50, its lowest price in nearly 11 years.
It's not just U.S. drug makers feeling the pain, either. European titans such as GlaxoSmithKline (NYSE:GSK - News) and Sanofi-Aventis (NYSE:SNY - News) are way down this year even though they have much less exposure to the whims of U.S. regulators and lawmakers.
Big Pharma's ongoing malaise -- particularly during a time of traditional strength -- says a lot about how far the industry has fallen from Wall Street's graces, analysts say.
"We're in a risk averse market right now, and the overall perception is that pharmas have too much risk and not enough reward," said Jon LeCroy, a medical doctor and pharmaceutical analyst at Natixis Bleichroeder.
The top risk involves lost sales of key products. In coming years, U.S. drug makers will lose patent protection on numerous blockbusters, including Pfizer's Lipitor cholesterol fighter, Merck's Singulair asthma treatment and Bristol's Plavix heart drug.
LeCroy figures that over the next four years, the top six U.S. drug firms -- the others are Wyeth (NYSE:WYE - News), Eli Lilly (NYSE:LLY - News) and Schering-Plough (NYSE:SGP - News) -- will lose patent protection on medicines that generate $52billion in annual sales (see chart).
That's a big chunk of change -- one-third of what the top six U.S. drug firms are expected to post in total revenue this year.
Most drug makers aren't doing enough to fill in the gaps with new products, experts say.
"There are no standouts as far as companies with near-term prospects for great drugs," said Les Funtleyder, analyst at Miller Tabak. "There are a lot of questions about pipelines."
Five of the six top U.S. drug makers will lose more sales from expired patents than they'll gain from new drugs, LeCroy says. "There's a really thin late phase three trial environment."
Most pharma companies are dealing with the problem by acquiring drugs in development at smaller firms or forging partnerships with biotechs. But even that has had mixed results.
"The argument is that they'll fill it in with acquisitions, but there's nothing to acquire," LeCroy said. "Everyone wants the same stuff, and there's not enough out there. All these deals we're seeing won't help until five or six years from now."
Meantime, the industry's financials are getting worse.
While most big drug firms still enjoy huge profits, earnings and sales growth are expected to hit the skids in coming years.
"Most companies will earn in 2012 similar to what they'll earn this year and next year," LeCroy said.
Few Capital Gains
While the industry wrestles with where to find growth, it also faces challenges in Washington, D.C. The Food and Drug Administration has slowed its number of approvals this year, experts say, in part because of a renewed focus on safety.
Big Pharma itself shares plenty of the blame. Unsafe drugs such as Merck's Vioxx pain reliever -- which was pulled from shelves in 2004 -- haven't done the industry any favors.
Neither have public relations blunders like the one involving Vytorin, made through a partnership between Merck and Schering. In April the two firms released data showing the drug does no better than a generic at slowing arterial thickening. Merck and Schering sat on the information for years before releasing it.
That kind of news has made it hard to muster much support in the nation's capital.
It's unlikely that Barack Obama or John McCain will change that.
"Neither candidate is considered a friend of pharma," Funtleyder said. "There's this uneasiness about the election, which has also hurt the stocks."