Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus,americast.usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Wed, Nov 4 1992 Date: Wed, 4 Nov 92 05:08:35 EST Message-ID: 11-04 0000 BONUS: Drug company stocks weakening USA TODAY Update Nov. 4, 1992 Source: USA TODAY:Gannett National Information Network Once the cream of American industry and quintessential growth stocks, drug companies are facing a future growing bleaker by the day. Politicians - notably Bill Clinton - are mad about rising health-care costs and are pressuring drug companies to slash prices. Competition from generic-drug makers is mounting. Bulk buyers of drugs, especially hospitals and health maintenance organizations, are demanding better deals. WHAT HAS HAPPENED TO PROFIT? The result: The industry's profit growth, which averaged near 20% a year for top companies in recent years, is expected to slow markedly. After riding top drug stocks higher at an average 25%-a-year clip 1988 through last year, investors are bailing out. The American Stock Exchange's drug-company stock index is down 19% this year vs. a 1% gain for the Standard & Poor's 500 index. Even Merck, one of the most admired U.S. companies, is down 22% from its high early this year. ARE THE GOOD TIMES REALLY OVER? It's unclear if the industry's heyday is truly over. Some investment pros say this is a no-brainer chance to buy great stocks at bargain prices. U.S. drug companies, considered the highest quality in the world, will run an estimated $975 million trade surplus this year. Their research is top-notch. And aging baby boomers, those 28 to 44 years old, will demand more and more varied drugs well into the future. CAN MONEY STILL BE MADE? In a recent USA TODAY survey of money managers, four of the 10 favorite stocks were drug companies. But for now, "it'll be difficult to make money in these stocks," predicts Ron Reel, analyst at investment firm Fred Alger Management. The main challenge will be to separate winners from losers. "You can't buy them blind anymore," says investor and former drug analyst Joe Freedman. WHAT IS THE BIG WORRY? Perhaps Wall Street's biggest concern about the industry is prices. For years, drugmakers have been able to boost earnings in large part by jacking up prices. Small wonder the industry's average profit margin, net income as a percentage of revenue, is 13%. That's four times the average for all companies in the Standard & Poor's 500 index. HOW MUCH HAVE PRICES CLIMBED? Prices for prescription drugs increased 67% 1985 through 1991, while the inflation rate was 26%, says a recent study by the General Accounting Office, a congressional watchdog. The price of the most widely used drugs rose fastest. The 15 top-selling prescription drugs (to non-elderly users) rose 80% 1985 through 1991, says a study by the Families USA Foundation. Earlier this month, another GAO report found that drugs in the USA cost much more than identical drugs in Canada. Most drug companies have said this year they'll hold price increases to the rate of inflation. WHERE DOES CLINTON STAND? Still, some politicians and advocates for senior citizens are fighting mad, charging price gouging and demanding steps to cap prices. Clinton pledged to make controlling health-care costs a priority, and supports a proposal by Sen. David Pryor, D-Ark., that would strip drug companies of certain tax breaks if they push up drug prices faster than inflation. HOW MUCH LEGISLATION IS THERE? That's only "one of about 40 bills in Congress having to do with health-care reform that would hurt drug manufacturers," says Sharon Dorsey, analyst at Advest Research. Even without price-cap legislation, market forces are pushing drug companies to trim price increases. Among them: Competition from generic drugs. One reason many big-selling drugs are profitable is that drugmakers have patents that give them exclusive right to produce and sell a drug, typically seven to 10 years. WHAT GOOD IS A MONOPOLY? That monopoly on a drug gives a company the ability to raise prices rapidly. But once a company's patent expires, others can make and sell the same drug, usually cheaper and without a brand name. The generic drugs force the original drugmaker to cut prices to stay competitive. That cuts revenue. This year through 1994, 24 drugs are slated to lose patent protection. Generic sales should surge. Last year, revenue from generic drugs approached $8 billion. WILL REVENUE CONTINUE TO GROW? That's expected to triple by the end of the decade. Drug analyst Hemant Shah estimates generics now account for 30% of all U.S. prescription drug revenue (an estimated $58 billion this year). He expects generics to account for 60% of all prescription revenue by the late 1990s. Among the most affected: Marion Merrell Dow, Syntex, Upjohn. Stock analysts are cautious about all three. Upjohn has four drugs, representing 50% of net income, losing patent protection the next three years. WHO ELSE WILL BE AFFECTED? Bulk buyers. Hospitals, HMOs and physician networks are fed up with high drug prices. They're increasingly forming committees to buy drugs with a single goal: Buy cheaper. They've become tough negotiators, using computer networks to stay up on cheaper generic and other competitive drugs. Sanford Bernstein analyst Kenneth Abromowitz says 25% of out-of-hospital prescription drug orders will be covered by bulk-buying committees by 1996 vs. 15% now. "It works," he says. The upshot of the upheaval: The industry's sizzling earnings growth is cooling. WILL REMARKABLE GROWTH CONTINUE? "It just isn't there anymore," says Aresen Mrakovcic, analyst at money management firm J&W Seligman. Says Roy Vagelos, CEO of Merck: "It would be wonderful if we could grow at 20% forever. That's impossible; we'd approach the GDP at some point." Salomon Bros. estimates that by 1994, average annual earnings growth for the top 10 drugmakers will fall to 12% from 18% last year. Signs of slowing abound: Merck recently said sales of its Proscar drug for enlarged prostates, which hit the market in August, are slower than expected. WHAT EFFECT HAVE STUDIES HAD? The drug took another hit this month, when a medical journal published a study questioning its effectiveness. That's one reason investors have been knocking Merck's stock lower. Syntex's painkiller Toradol, launched in March, started slower than expected. Ditto its anti-stroke drug, Ticlid, launched in December. Bristol-Myers Squibb is facing a rough time with several drugs, including Pravachol, a cholesterol fighter; Monopril, for heart disease; and Cefzil, an antibiotic. Bonus Editor: Beth Mann. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM