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FDA/Maraviroc: Concerns Over Drug Safety, Patents Weigh on Big Pharma
 
 
  Wall St Jnl
By PETER LOFTUS
June 22, 2007 5:57 p.m.
 
Big Pharma stocks appear to need a pick-me-up pill.
 
A rally in the shares of large drug makers has reversed course in recent weeks due to concerns about drug safety and patents, as well as pending U.S. legislation that would increase regulation of the industry. Some investors have simply locked in profits for stocks that are still up solidly for the past year.
 
The recent selloff, however, has brought prices to more attractive levels, and some bulls see better times ahead despite the industry's challenges.
 
Many Big Pharma stocks gained from March through May but have since retreated. Sanofi-Aventis's American depositary shares are off about 15% over the past month, for instance, while Schering-Plough Corp. shares are down about 11%. The Amex Pharmaceutical Index is off nearly 6% in the past month.
 
Some investors worry that drug makers are having a tougher time getting new products approved by the U.S. Food and Drug Administration. This week, the FDA delayed approval of a proposed HIV treatment from Pfizer Inc., possibly due to concerns about safety risks. Last week, an FDA advisory panel recommended against approving a Sanofi anti-obesity drug due to concerns about psychiatric side effects; a final decision is pending.
 
Drugs already on the market are facing tougher scrutiny, too. Safety concerns have mounted in the wake of a May study linking GlaxoSmithKline PLC's blockbuster Avandia diabetes drug to heart-related risks, and a series of studies citing risks for anti-anemia drugs made by Amgen Inc. and Johnson & Johnson.
 
The U.S. Congress appears set to approve legislation that would give the FDA new powers to regulate drugs after they go on the market. Some analysts believe this could increase drug makers' costs.
 
"Clearly there's a move towards monitoring these drugs post-approval for safety issues," said Linda Bannister, analyst with Edward Jones. "That's going to increase costs for the industry."
 
Even before any new legislation is enacted, the FDA has signaled it is being more aggressive in monitoring drug safety (though some critics say the agency hasn't done enough). The agency "must stay engaged even after these products are approved," FDA Commissioner Andrew von Eschenbach said Thursday at a cancer symposium in Philadelphia. He told Dow Jones Newswires the agency was pursuing tools to proactively monitor drug safety while relying less on the "passive" reporting of potential side effects by doctors and drug companies.
 
Drug makers certainly don't see an end to the heightened safety concerns anytime soon.
 
"I think there is going to continue to be scrutiny on safety," Thomas Koestler, head of Schering-Plough's research arm, told investors at a Goldman Sachs conference last week. "We are in a very risk-averse environment when it comes to the regulatory environment right now."
 
And then there is the patent situation, as court rulings have threatened patent protection for branded drugs. Novartis AG recently lost a legal battle to keep cheaper, generic versions of its Lotrel anti-hypertension medication off the U.S. market, despite an existing patent for the drug. And some Supreme Court rulings in other cases appear to make it tougher to defend patents in general.
 
Cautious Optimism
 
Some Big Pharma stocks now appear cheaply valued, providing bulls cautious optimism for coming months. Most of the stocks have price-to-earnings ratios -- based on current-year estimates -- at or below their five-year averages. Cheap standouts on this basis are Pfizer, J&J and Glaxo. A notable exception is Bristol-Myers Squibb Co., whose shares are up solidly in the past month, helped both by this week's victory in defense of the U.S. patent for the Plavix heart drug and by continued takeover speculation.
 
Ms. Bannister of Edward Jones believes investors should be cautious in their expectations for price appreciation for drug stocks. However, the stocks may deliver solid total returns in coming years because some have relatively high dividend yields. Pfizer pays an annualized dividend of about 4.5% of its stock price, versus an average yield of about 2% for dividend-paying stocks in the S&P 500 index.
 
What's more, Ms. Bannister sees drug companies taking steps to offset the various challenges. Several companies have cut costs by trimming sales forces, and Ms. Bannister sees room for more cuts.
 
It is harder to cut spending on drug research and development, but some companies are trying to spread these costs around. Bristol-Myers this year has formed separate partnerships with Pfizer and AstraZeneca PLC to help develop and co-market a few of its experimental drugs. Cost cuts and partnerships could help drug makers' earnings growth, even if it becomes more difficult to get certain drugs on the market, or to sustain sales growth of existing drugs.
 
A Credit Suisse market strategist recommends portfolios go overweight with pharmaceutical stocks. The firm said in a research note Friday that cost cuts and new product launches will help drug makers' financial results in coming years, and it cited the relatively low P/E ratios.
 
A key test for the stocks will be the second-quarter earnings season, which gets under way in a few weeks.
 
 
 
 
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