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SmartMoney.com
Just Say Yes to Drugs
Tuesday July 8, 3:26 pm ET
By James B. Stewart


This article was originally published on SmartMoney Select on 7/01/03.

I HAVEN'T DISCUSSED the pharmaceutical sector in some time, but it has long been one of my core holdings, and remains so despite the current worries about prescription-drug benefits, loss of patent protection for blockbuster drugs and an allegedly meager research pipeline. Indeed, with stock prices depressed for these and other concerns, pharmaceutical stocks have rarely looked more attractive.
Just last week, giant Pfizer (NYSEPFENews; one of my core holdings) announced that its scientists were making striking progress in developing treatments for malaria, smallpox and SARS. A week earlier, Pfizer announced accelerated clinical trials for a pill to help smokers quit. The company said early tests showed that half of those smokers taking the pill were able to quit smoking in just seven weeks. The potential market is vast, since there are an estimated one billion smokers world-wide. And earlier trials of Pfizer's cholesterol-reducing drug Lipitor showed striking success at preventing heart attacks in diabetics.

This is the medical-research equivalent of a Triple Crown — an astounding achievement from a company some had worried was too big to achieve meaningful growth. So how has Pfizer's stock responded? A little over a month ago, it was just under $34. This week, it was at $34 and change. And this underwhelming performance came in the midst of a strong market rally.

Ditto Merck (NYSEMRKNews), another pharmaceutical giant (which I also own) that has had its share of good news, too. Last week it announced the results of a 10-year study showing that men cut their risks of prostate cancer by 25% by taking a drug with the same active ingredient as Merck's antibaldness remedy Propecia. Nearly a quarter-million American men are expected to develop prostate cancer this year. Since Merck's drug is a preventitive, it seems like something all men may want to take at some point — another huge potential market. Although Merck's stock rose recently on the news, at $60 it's about where it was on May 14.

Year-to-date, Pfizer is up about 11%, and Merck about 7% — respectable, but well behind many stocks in other sectors. I find this puzzling, since these research efforts seem so promising. They demonstrate that just when Wall Street analysts seem to least expect it, a breakthrough is announced. This shouldn't be all that surprising, since most pharmaceutical R&D efforts are shrouded in secrecy, which is why I generally discount analyst assessments of a company's "pipeline." For that reason, I have often added to my positions in drug stocks when analysts are in the depths of despair, as long as the companies in question have strong R&D components. But at the moment, the recent developments don't yet seem to be reflected in the share prices of Pfizer and Merck. Thus I wouldn't be unduly concerned that Pfizer remains Wall Street's run-away favorite, closely followed by Johnson & Johnson (NYSEJNJNews). But I'd also be especially interested in Merck and Eli Lilly (NYSELLYNews) — both with mediocre analyst recommendations — or even Bristol-Myers Squibb (NYSEBMYNews), still in the doghouse (and under investigation) over inventory-control problems. The company has some allegedly interesting cancer research underway, as well as a stake in Imclone's (NASDAQIMCLENews) Erbitux. (I also own some JNJ, LLY and BMY).

Mind you, I'm not adding to these positions at the moment, because as I've said repeatedly, I'm waiting for the market to pull back to another of my buy signals (which it seems to be in the course of doing). But I feel good owning these stocks. The pharmaceutical sector has survived repeated scares (remember the Hillary Clinton health-care plan?), and I predict it will emerge largely unscathed from the current proposed revisions to Medicare. Congress shouldn't be reducing incentives to develop new cures — the worst possible result for senior citizens clamoring for a prescription-drug benefit. I think legislators realize that, and will act accordingly. If that happens, the entire sector should rally. Meanwhile, while pharmaceutical companies sometimes behave as badly as other large corporations, it's gratifying to be one of their shareholders when they do announce a promising new advance against deadly diseases, as Pfizer and Merck did this past week.