The once "invincible" Pharmaceuticals sector is showing new signs of weakness. Today Merck announced that it expects slightly higher profits in 2007. Yet in spite of that--Merck shares fell 1.5 percent in heavy early trading. And just days ago, Pfizer had to stop development of a potentially blockbuster drug because it posed health dangers.
Where’s the smart money in Big Pharma? CNBC’s Mark Haines asked Albert Rauch, Senior Healthcare Analyst at AG Edwards and Michael Shulman, Editor of Change-Wave Biotech Investor.
Michael Shulman said he thinks it’s possible to capitalize on Pfizer’s flop because the market has completely over-reacted to the news. And because Lipitor has another 3 years on patent-- he thinks even a growth investor should be interested in the stock especially.
Shulman believes Merck is in a much worse situation – he says between now and 2010 they’re going to face 8 billion dollars in generic competition and they’re likely going to lose 90% of market share (according to his surveys of physicians.) He feels Merck's product pipeline won’t even come close to helping out revenues. Shulman recommends shorting Merck, because the CEO keeps talking about operating income and not net income. He thinks their earnings are going to be very weak.
Albert Rauch says his concern is near term. He says between now and 2008 – Pfizer is going to face a lot of generic competition. Because Lipitor goes generic in 2011, Rauch says it’s difficult to see top line growth for the rest of the decade.
Rauch also has a lot of concerns about Merck. They lost Zocor in ’06, and they lose many other drugs in the upcoming years. He says that’s a tremendous amount of revenue to replace in a short period of time.
Analyst disclosure: AG Edwards received compensation from WYE, PFE BMY for procedures or services other than investment banking during the past 12 months. AG Edwards and/or officer(s) own a short position in BMY, PFE's equity securities. AGE and/or officer(s)own a long position in PFE's equity securities.