Originally created 07/22/98

Merck drags down drug stocks



NEW YORK -- Merck & Co. on Tuesday lowered its profit expectations for the year, a move that dragged down stocks of other pharmaceutical companies even though some reported second-quarter earnings near Wall Street forecasts.

Wall Street has had a voracious appetite for drug stocks. But Merck's cautionary note put investors off of the traditionally market-beating drug sector.

As earnings for Merck and SmithKline Beecham PLC disappointed investors, Schering-Plough Corp. slightly beat analysts' early expectations, and American Home Products Corp. and Bristol-Myers Squibb Co. matched forecasts. Schering's stock had already been boosted after the company told analysts earlier this month it would slightly beat forecasts.

Shares for all five drug makers skidded on the New York Stock Exchange, led by Merck, which fell $9.81 to close at $128.56 per share.

"These are high-valuation stocks, and all these stocks have the highest possible expectations built in," said Hemant Shah, an independent analyst in Warren, N.J. "When you have even a minor disappointment, the stock tanks."

American Home Products slipped $2.12 to $50.68 per share, Bristol-Myers fell $5.87 to $119.93 and Schering was off $3.8 to $99.75. SmithKline's U.S. listed shares were down $4 to $59.56.

Merck's second-quarter profit fell a penny below analysts' expectations. But investors sold the stock after company officials told analysts in a conference call that earnings for the year would likely be at the low end of Wall Street forecasts. Analysts expect the company to earn $4.27 to $4.40 per diluted share this year, compared with $3.74 last year.

Analysts also have grown increasingly concerned about the company's earnings as its lucrative cholesterol-lowering drugs, the older Mevacor and the newer Zocor, have lost market share, sliding from about 50 percent a year ago to about 30 percent now.

That's due largely to the blockbuster success of Lipitor. Sales of the Warner-Lambert drug tripled to $533 million in the second quarter, in part due to the formidable sales staff at Pfizer Inc., which is co-marketing Lipitor through an agreement with Warner-Lambert.

Merck earned $1.32 billion, or $1.07 per share, on a diluted basis, compared with $1.15 billion, or 93 cents a share, in the comparable 1997 quarter. Analysts surveyed by the securities research firm First Call had expected profit of $1.08 per share.

Sales for the Whitehouse Station, N.J.-based drug maker were $6.47 billion, compared with $5.91 billion in the same quarter last year.

American Home Products earned $523.5 million, or 39 cents per share, compared with $459.1 million, or 35 cents a share, a year ago.

The Madison, N.J., drug and consumer products giant had sales of $3.34 billion, below sales of $3.50 billion during the comparable period last year.

Bristol-Myers Squibb earned $835 million, or 82 cents per share, compared with $738 million, or 73 cents per share, a year earlier.

Second-quarter sales were $4.43 billion, compared with $4.06 billion. The company said sales were slowed by unfavorable foreign exchange rates.

"This performance is not acceptable," said Bristol-Myers' chief financial officer Michael Mee, who predicted the company would meet forecasts for the remainder of the year.

Slightly outpacing Wall Street forecasts, Schering-Plough earned $455 million, or 61 cents per share, compared with $373 million, or 50 cents per share, a year ago. Analysts had originally expected profit of 60 cents, but adjusted their expectations after Schering disclosed some earnings figures on July 1.

Madison, N.J.-based Schering had sales of $2.12 billion, compared with $1.72 billion last year.

SmithKline Beecham, lagging its American counterparts, earned $383 million, or 35 cents per share, in the second quarter, compared with $362 million, or 33 cents per share, a year ago.

The British drug maker failed to reach its expected profit growth, blaming foreign exchange rates and difficult international markets, but held out hopes for double-digit growth for the year.

The company had sales of $3.20 billion, compared with $3.09 billion.