Drug firms offer some attractions

February 09, 1994|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Take two aspirin and call your broker in the morning.

Many shareholders of pharmaceutical companies have developed migraine headaches during the relentless march toward some form of health care reform.

Despite all the worries, a number of factors remain in favor of drug companies.

Our population is aging and rather well off, with high expectations for medical treatment. Scientific breakthroughs in pharmaceuticals to combat diseases continue unabated. After runaway price gains in the 1980s, the price rise of medicines has subsided. Finally, many drug treatments are able to keep patients out of the hospital, thereby saving money for the overall health system.

The negative side of the equation is that pharmaceutical companies that are marketing-driven rather than featuring solid research and development with a strong pipeline of innovative new products are in big, big trouble.

"The strongest pharmaceutical firms are the best choices for long-term investment; and the weak ones won't come back because their patents will expire, they won't be able to raise prices and they won't have new products," said Richard Vietor, analyst with Merrill Lynch & Co. "Companies must adjust to the more stringent market environment of managed health care and must embrace new technologies."

Some 35,000 jobs have been eliminated in the industry in the past 16 months, and there's no end in sight to cutbacks. Meanwhile, the average rate of return in terms of earnings per share of 18 percent in the 1987-1992 period will likely slide to 8 percent for the 1993-1998 period.

"Investors should build holdings in a few selected pharmaceutical names, for volatility will be high over the next 12 to 18 months," warned Ronald Nordmann, analyst with PaineWebber Inc. "One effect of health care reform that could be a plus, however, is universal coverage, in that 37 million who don't have any health insurance now would be covered, and therefore the demand for drugs will increase."

Be realistic in your short-term expectations. "This will be the most important transitional period in the history of the pharmaceutical industry, and even some large companies won't be successful in the new environment," said Kent Blair, analyst with Donaldson Lufkin & Jenrette.

Even mergers of companies in order to eliminate duplication of sales and marketing staffs won't really help if there aren't enough profitable new products to sell.

Several drug companies stand out as strong long-term industry survivors worth considering for investment:

* Pfizer Inc. is recommended by all three analysts. The company spent $1 billion on research and development last year and has an outstanding pipeline of products. These include Procardia XL, the leading cardiovascular drug in this country and third largest selling pharmaceutical of any kind in this country; Diflucan, the leading systemic antifungal worldwide; Zithromax, the first of a new class of antibiotic that targets delivery directly to the site of infection; Zoloft, a new-generation anti-depressant with few side effects; Norvasc, a new one-a-day calcium channel blocker for treatment of angina and hypertension; and Cardura, an alpha blocker for treatment of hypertension.

* Merck & Co. is admired by Vietor and Blair. The industry titan of the 1980s, it has made a bold move by buying Medco Containment, which sells prescription drugs by mail. Its Proscar for prostate enlargement and Fosamax for osteoporosis are significant due to the aging population.

* Schering-Plough Corp. is a favorite of Nordmann and Blair. Its popular new antihistamine, Claritin, is gaining market share, as is its anti-cancer and anti-viral drug Intron A. Consumers are familiar with its market-leading Afrin, Coppertone and Scholl's brands as well.

* Warner-Lambert Co. is recommended by Vietor and Nordmann. It has signed deals with Burroughs Wellcome and Glaxo Holdings to expand its over-the-counter business to include Wellcome's anti-viral agent Zovirax. It is launching its own Cognex drug for treating Alzheimer's disease.

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