Transcripts

The Pharmaceutical Sector's New High

PAUL KANGAS: On Wall Street today, investors cheered strong earnings from several drug giants. Pfizer, SmithKline Glaxo and Wyeth are the latest drug companies to beat estimates. But as Erika Miller explains, the long- term prognosis for the sector is uncertain.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Major pharmaceutical companies have been surprisingly resilient in the face of a many industry and economic challenges. Today, the world's two biggest drug makers, Pfizer and GlaxoSmithKline, both beat forecasts for second quarter earnings. So did Wyeth, maker of Advil and Centrum vitamins. Lehman Brothers analyst Tony Butler says those companies and others are benefiting from strong sales overseas. Lehman has done business with Pfizer over the past year and Butler owns the stock.

TONY BUTLER, PHARMACEUTICAL ANALYST, LEHMAN BROTHERS: You have seen tremendous growth ex-U.S. That's not only driven by foreign exchange. In the case of Pfizer today, it was actually driven by organic growth.

MILLER: According to Thomson-Reuters, half of the 14 pharmaceutical companies in the S&P 500 have now reported quarterly numbers. On average, earnings are running 11 percent ahead of last year's second quarter. That compares to a more than 16 percent decline in earnings for the S&P 500. Investors were pleased Pfizer reaffirmed its 2008 outlook and Wyeth boosted its full-year earnings forecast. But analysts caution many big drug companies face serious competitive threats, including patent expirations on their best selling drugs.

BUTLER: The real challenge has been the timing of developing that next generation product or series of products to help offset that patent expiry. And my sense is the timing has been longer. Now, perhaps that's due to the draconian nature of the FDA. The FDA's standards have clearly risen.

MILLER: S&P analyst Herman Saftlas says patent expiration is a particularly big issue for Pfizer, which makes cholesterol fighter Lipitor, the worlds best selling drug. He has the stock rated hold.

HERMAN SAFTLAS, PHARMACEUTICAL ANALYST, STANDARD & POOR'S: We realize the fact that close to one fourth of their sales and maybe more than one fourth of their earnings comes from Lipitor, which is going to lose patent protection in 2011. But we realize that they also undergoing a major cost- cutting program.

MILLER: Other companies are making strategic shifts. GlaxoSmithKline, for example, plans to boost profits by becoming a more globally diversified company with lower costs. It also hopes to improve research and development of new drugs. There's one other way companies are trying to boost profits: consolidation. Analysts predict big pharmaceutical companies will continue to acquire smaller players with promising drug pipelines. Erika Miller, NIGHTLY BUSINESS REPORT, New York.