MERCK: Lower Earnings Drag Down Drug Stocks
Merck & Co. "sent a sudden illness through Wall Street yesterday when it said its earnings wouldn't keep pace with analysts' estimates." The drugmaker told investors its second-quarter earnings "would fall a penny short of expectations," an announcement that "sent Merck's shares into a tailspin," the New York Daily News reports. "Not only has Merck moderated expectations for itself, but it has put out a caution light for all the major U.S.-based companies that growth in the second half will be slower than anticipated," said OrbiMed Advisors analyst Samuel Isaly (Feldman, 7/22). Along with the announcement that Merck earned $1.32 billion, or $1.07 a share, company officials told investors "that earnings for the year would probably be at the low end of Wall Street forecasts."
Not So High Five
The AP/New York Times reports that Merck's "cautionary note put investors off the traditionally market-beating drug sector" and as a result, stocks for the five major drugmakers "skidded" on the NYSE. Merck's stock dropped 7% to $128.5625 a share; American Home Products shares "slipped" $2.125 to $50.6875; Bristol Myers saw its shares drop $5.875 to $119.9375 and Schering-Plough's were "off" $3.1875 to $99.75. SmithKline Beecham shares were down $4 to $59.5625. "These are high-valuation stocks and all these stocks have the highest possible expectations built in. When you have even a minor disappointment, the stocks tank," said analyst Hemant Shah (7/22). "Anything which can go right is already built into the stock price," he said (Corrigan, Financial Times, 7/22). The Wall Street Journal reports that the stocks of the other four drugmakers sank even as the companies "reported higher earnings fueled by rollicking U.S. sales of new drugs to fight cancer, heart disease, depression and allergies."
Overall, Merck's second-quarter earnings were up 14%, "but revenue fell 4.5%." Merck's predicament, analysts said, "is that some of its top earners, such as cholesterol drug Zocor and AIDS drug Crixivan, are facing increased competition while the company is spending heavily to roll out new products." J.P. Morgan & Co. analyst Carl Seiden said, "They have to defend these aging blockbusters and give full support to what is really an impressive collection of newly introduced products. They have to spend more" (Petersen, 7/22). The AP/New York Times notes that Merck's "lucrative cholesterol-lowering drugs, the older Mevacor and the newer Zocor, have lost market share, sliding to about 30% from about 50% a year ago" (7/22). "They really are just letting Mevacor bleed," Seiden said. Merck's patent on Mevacor expires in 2000 (Wall Street Journal, 7/22).