Pharmaceutical firms have been at the heart of defensive stock investing during this recession. The drug company group has risen better than 20 percent in value in 1991, providing predictable earnings and low risk as well. The more volatile bio-pharmaceutical stocks doubled even that handsome return.
Demand for pharmaceuticals and medical treatment, after all, has more to do with one's physical condition and the Food & Drug Administration approval process than with the general effects of the economy. Fifteen percent earnings growth is predicted for the group this year.In light of this performance, some experts worry that perhaps there's been too much of a good thing. Maybe stock prices have gone too high, the group's gains will slow in an improving economy and a stronger dollar will hurt earnings results of these multinational firms.
"Pharmaceuticals typically underperform the overall market coming out of a recession," warned Mary Ellen McCarthy, pharmaceuticals analyst with Shearson Lehman Brothers. "The investor should consider scaling back his pharmaceutical holdings the next three to six months and moving into cyclical stocks until pharmaceuticals begin outperforming the market once again in 1992."
Pharmaceutical stocks are still golden for the long term, but just not quite as attractive as they've been recently.
A raft of new products are scheduled to come on line the next several years, assuring that more and more money will come into corporate coffers. Firms also are benefiting from the divesting of their lower-profit-margin, non-pharmaceutical businesses.
Caution is required.
Picking the specific stock now matters a lot more than selecting the group.
"While reasonably priced, pharmaceutical stocks aren't really cheap, and I expect their pricing will be less robust than it was the past five years and that growth also will slow," said Barbara Ryan, pharmaceuticals analyst with Prudential Securities. "The investor must avoid paying too high a price for a company because of the introduction of any sexy new drug."
Bristol-Myers Squibb Co. will continue to show the benefits of the merger of Bristol-Myers with Squibb, and has prospects for many new product introductions.
It's recommended by both Ryan and McCarthy.
Ryan also likes Merck & Co. for its 20 percent earnings growth; Schering-Plough because it's controversial, but has good prospects; SmithKline Beecham because of its reasonable price and new products; and Warner-Lambert because it features the best over-the-counter group.
Meanwhile, McCarthy suggests the stock of Pfizer Inc. because it has the best product cycle and could reap major benefits if it decides to restructure. She likes American Home Products because it isn't well-followed and has undergone a radical restructuring.
The generic drug industry has been in a mess, the result of fines and sanctions for bribing FDA officials. While the approval process has been slowed, new FDA officials are now in charge of the group and prospects should improve.
"Firms that make generics are the nemesis of the rest of the pharmaceutical industry, but everything favors this group going forward," predicted Jim Flynn, generic pharmaceuticals analyst at Kidder Peabody. "Brand-name drug prices are going up rapidly and, lately, insurance companies and government groups have been consolidating their efforts to contain such costs."
Flynn likes the stock of generics, such as Mylan Labs, because it's the "white knight" firm that uncovered the FDA fraud and brought it to Congress; A.L. Labs because its liquid generics business is impressive; and Biocraft Labs because it should snap out of its "break-even mode" once some new products are approved.