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There have been several noteworthy developments in the drug space recently, which will likely have a material impact on the companies in this sector and the markets they serve. Drugmakers featured in this review include Pfizer Inc. (PFE - Free Pfizer Stock Report), Merck & Co. (MRK - Free Merck Stock Report), GlaxoSmithKline (GSK), Johnson & Johnson (JNJ - Free Johnson & Johnson Stock Report), and Bristol-Myers Squibb (BMY).

Introduction

Following a weak third-quarter showing, stocks in the pharmaceuticals sector slightly outperformed the broader market averages in October. A solid earnings season for “large pharma” companies and increased clarity regarding the European debt situation helped drive the rebound. 

Pfizer’s Third-Quarter Profits Nearly Triple

The world’s largest drugmaker posted earnings of $0.31 a share during the September interim, up from $0.11 in 2010, easily surpassing our estimate of $0.27 (the figure excludes a one-time gain of $0.17 a share related to the sale of Capsugel). Performance was driven by a 7% increase in revenues, which rose to $17.2 billion, and an effective cost-cutting campaign. Sales of the company’s popular, cholesterol-fighting drug Lipitor jumped 3% during the quarter to $2.6 billion helping to support top-line growth. Unfortunately for Pfizer, the company is scheduled to lose U.S. exclusivity for the product on November 30th and swarming generic competition will likely cut into sales over the next few quarters. Even still, the solid third-period showing resulted in management raising its earnings guidance for full-year 2011. It now estimates share-net to be in a range of $1.20 - $1.30, up from $1.09 - $1.24.

Merck Exceeds Expectations

Merck, the country’s second largest drugmaker reported third-quarter earnings of $0.94 a share, surpassing our estimate of $0.88 and up about 10% versus the comparable period of 2010. Strong gains in the pharmaceuticals segment helped support an 8% year-over-year increase in revenues, to $12.02 billion. Merck’s diabetes drug, Januvia saw sales rise 41%, to $846 million, while Gardasil, Singulair, and Janumet all experienced double-digit volume growth. For 2011, management has once again narrowed its earnings guidance range, raising the low end from $3.68, to $3.72. Merck now estimates share net to be in the range of $3.72 to $3.76.

GlaxoSmithKline Reaches Record $3 Billion Settlement

In early November, the U.K-based drugmaker reached a $3 billion settlement with the U.S. government over aggressive sales and marketing practices on several key products including Advair and Avandia. In fact, selling and marketing tactics of at least nine medicines have been cited dating back over a decade. The cash settlement, which is still subject to negotiation, would be the largest in pharmaceutical industry history, trumping Pfizer’s $2.3 billion payout to the U.S. government back in 2010. That said, management at GSK indicated there would be no impact on future share repurchases or dividends because it plans to utilize the $3.5 billion cash provision it took as a charge in the fourth quarter of 2010. The agreement is expected to be finalized in the third quarter of 2012.

Johnson & Johnson Wins Key FDA Nod on Xarelto

After experiencing a few setbacks earlier in the year, Johnson & Johnson and its partner Bayer received a crucial FDA approval for its stroke prevention medication Xarelto on November 7th. The drug was approved for long-term use in patients with atrial fibrillation marking a key milestone for both companies. Atrial fibrillation is one of the most commons types of irregular heart rhythms and affects more than two million people. Xarelto is expected to compete with Elquis, a comparable product from Bristol-Myers Squibb.

 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.