Could Street turn negative on Pfizer, Merck after earnings?
Both Pfizer and Merck are expected to report double-digit declines in top- and bottom-line growth when they announce earnings Tuesday. But lack of growth doesn't seem to bother Wall Street. The stocks are trading near multiyear highs and have gained roughly 18 percent this year.
Why is Wall Street supporting firms that are seeing slower growth? First, according to analysts, because the wave of patent expirations that hit big drugmakers was widely anticipated, the sales slowdown is already priced in. Second, investors like the big dividends.
A high-growth sector in the early 2000s, pharmaceuticals has been under pressure over the past few years as drug patents expired, allowing makers of lower-priced generics to move in on the market.
In response, big pharma companies have been working relentlessly on building out pipelines by developing drugs in-house or simply acquiring early- to mid-stage biotech firms that are working on promising drugs.
Pfizer's blockbuster cholesterol drug, Lipitor, went off-patent in late 2011. As expected, sales have fallen drastically. Lipitor had sales of $3.9 billion last year, versus $12.7 billion in 2007—a 68 percent drop. JPMorgan has forecast that Lipitor will ring up sales this year of just $1.7 billion.
It's a similar story for Merck's blockbuster allergy remedy, Singulair, which posted a sales decline of 30 percent last year, to $3.9 billion.
In terms of dividends, drugmakers have been putting their cash to that use in an effort to lure investors craving yield. Pfizer and Merck, among other names, have consistently increased their dividend yields—3.3 percent and 3.5 percent, respectively. In contrast, the S&P 500's average dividend yield is 2 percent.
For Pfizer, the world's largest pharmaceutical company, the Street forecasts second-quarter earnings of 55 cents a share, 11 percent less than the year-earlier period, on revenue of $13.02 billion, a 14 percent drop.
Analysts polled by Thomson Reuters expect a 9 percent contraction in Merck's revenue growth compared with the 2012 quarter, to $11.2 billion, and a 21 percent plunge in EPS, to 83 cents.
On the Pfizer and Merck calls, Wall Street will be looking for clarity on progress in new-product development.
For Pfizer, all eyes are on cancer drug palbociclib.
"Expectations are suddenly very high, even though only one small clinical trial with this mechanism of action has reported out thus far," said Tim Anderson, senior analyst at Bernstein Research,
For Merck, Anderson said, there is clear excitement building around lambrolizumab, an experimental drug for advanced melanoma, "which now gives Merck bulls a tangible product on which to focus."
—By CNBC's Seema Mody. Follow her on Twitter @SeemaCNBC.