Drug Stock Scorecard: MRK, SGP Losers--Pfizer A Winner

Who’s the winner and loser in drug stocks today? As mentioned earlier,Schering-Plough down 25 percent (!) and Merck down 16 percent pre-open on a study that showed that the companies cholesterol lowering drugs Vytorin and Zetia were not more effective than less expensive drugs.

There is now serious question about whether Schering can survive as an independent company, given its dependence on Vytorin.

We know the losers, but here's who traders tell me are the likely winners:

1) Abbott, which has a big cholesterol franchise, and new products coming to market.

2) Pfizer, because there is less competition for Lipitor until the patent expires.

3) AstraZeneca, because of their statin drug Crestor.

4) Healthcare services like Express Scripts and Medco, because they will likely make more money off of generic drugs than branded drugs; they will see more generic Zocor instead of Vytorin.

Elsewhere:

1) Window dressing? What window dressing? The last day of the quarter often sees a bit of volatility as traders buy winners and sell losers--but what do you do when almost everything is a loser, to one degree or other? The Street has been--and remains--net short. That makes this last day of trading complicated--this is not old fashioned window dressing. Because the Street is so short, they could take everything lower, which would turn window dressing into window breaking.

2) When will financials find a bottom? One thing to look for is National City--the company has suffered big credit losses, and while they may be able to raise more capital it is widely speculated that they will ultimately be sold. What would it be bought for? No one seems to know. There's several problems: a) the pool of buyers is limited, and b) no one knows how big the losses are, or how much capital the acquirer would need to add. Given these facts, expectations are so low that even a modest premium would be greeted with relief.

3) Wait, don’t look under that cup, look under this one! The 3-card monte earnings game has begun for the second quarter, and the motto is, “When all else fails, look elsewhere!” Many bulls have simply switched their strategies: forget picking a bottom in financials, it’s NON-financial profits that will be more resilient in 2008 than expected.

This is now the strategy at UBS, for example, where David Bianco is arguing that a number of factors indicate non-financials will outperform in 2008: a) Strong global GDP growth, b) weak dollar, c) easy comparisons in weak sectors such as homebuilding and transports, d) earnings trends look better than in the last recession in 2000-01, e) other indicators of margins--manufacturing capacity utilization, unit labor costs, and ISM-look better than 2000-01, and f) UBS forecasts a shallow recession, with a recovery in H208.

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