Long horizon foreseen for any drug stock revival

Andrew Leckey

September 08, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Talk isn't cheap.

At least not for the weary shareholders of pharmaceutical companies. They've seen the value of their investments drop nearly 40 percent in the last year and a half because of persistent talk about health-care reform.

Other health-care stocks have been similarly hard-hit, although companies that encourage tighter pricing should actually benefit from reform. Direct government price controls on drugs now appear unlikely, with indirect price controls through insurance companies looking more like the final outcome.

"The key negative in health care isn't the Clinton plan, but ongoing discussion of the plan," observed Kenneth Abramowitz, analyst in health care, medical supply and technology with Sanford C. Bernstein. "Drug companies and hospitals are in big trouble."

Although investors should probably stick with what they have, ,, they shouldn't put much more money in health-care stocks until after the congressional debate, he reasons. That lengthy debate will be kicked off by President Clinton Sept. 22.

"An investor will need a strong stomach over the volatile next 12 months, so my advice is to take a three- to five-year view," counseled Jonathan Osgood, analyst in medical supply and technology with Alex. Brown & Sons.

"Because of political pressure, industrywide product price increases of 10 percent annually in the 1980s will be more like 3 percent, taking away the growth of these stocks," warned Kent Blair, pharmaceuticals and hospital-supply analyst with Donaldson Lufkin & Jenrette.

Drug companies must offer their very best prices in the future, a trend already under way because of the buying power of giant health maintenance organizations, or HMOs. Blair advises shareholders to use periods of strength to reduce positions, since it may be three years before it will be possible to better assess change.

"Since health-care reform will accentuate HMOs and a consolidation of buying power, there will be significant cuts in the sales forces of drug companies," predicted Mariola Haggar, pharmaceuticals analyst with Salomon Brothers. "A major problem for drug companies is that all of this is occurring when many patents are running out, a time that would have been quite difficult anyway."

A positive for investors, however, is that pharmaceutical company dividends, currently running at 4 percent to 5 percent, are unlikely to be cut, since cash flow is adequate to cover them.

That said, there are still investment opportunities among a diverse group of health-care stocks, especially those of firms likely to prosper no matter what transpires in Washington:

* C.R. Bard, rich in new products, is recommended by Abramowitz, Blair and Osgood. Three balloon angioplasty catheters recently received Food and Drug Administration approval.

* Medtronic Inc., one of the most innovative firms, is suggested by Abramowitz and Osgood. There has been high demand for its implantable pacemaker-cardioverter-defibrillator.

* Baxter International, which has an attractive stock price, is recommended by Abramowitz and Blair. It is streamlining its hospital-products division.

* Schering-Plough Corp., featuring good earnings momentum, value and no major patent expirations, is a favorite of Blair and Haggar. Sales of its anti-cancer/anti-infective medicines are strong.

* Abbott Laboratories, diversified and well-managed, is a pick of Osgood. Its Biaxin antibiotic for respiratory infections is gaining popularity.

* Haemonetics Corp., whose blood-collection systems are important because of modern health concerns about blood, is an Osgood selection.

* Pfizer Inc., with a solid product pipeline and no big patent pTC expirations, is recommended by Haggar. There is demand for its cardiovascular medicines.

* Becton, Dickinson is a pick of Blair, its diagnostic-products division gaining importance in immunology.

* Bausch & Lomb, a popular consumer health-care company likely to have 15 percent earnings growth no matter what Clinton does, is recommended by Blair.

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