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Legal Problems, Taxes Drag Drug Makers

Posted on: Thursday, 21 July 2005, 18:00 CDT

TRENTON, N.J. - Large one-time charges hurt the bottom lines - and lowered share prices - of three major drugmakers Thursday, slashing second-quarter net income at struggling Merck & Co. and triggering losses at Eli Lilly & Co. and Schering-Plough Corp.

But excluding the one-time items, for legal problems and a big tax bill, Merck and Lilly managed to meet Wall Street expectations. Schering-Plough surpassed analysts' forecast by 8 cents per share.

"There are some signs of encouragement with some of the companies," said Robert Hazlett, an analyst with SunTrust Robinson Humphrey. "The group in general looks reasonably inexpensive at this point. We're encouraging investors to consider this group."

Earlier in the week, three other U.S. pharmaceutical companies - Pfizer Inc., Wyeth and Johnson & Johnson - reported higher net income and sales, generally by 10 percent or more. Each beat analysts' forecasts by 2 cents.

Independent analyst Hemant Shah of HKS & Co. said it is still "a pretty challenging environment" for drugmakers dealing with, or about to face, loss of patent protection and subsequent lost sales for their top drugs, particularly Merck and Schering-Plough.

"In my opinion, another cycle of consolidation is inevitable," with companies not producing enough new drugs to make up for lost revenues, Shah said.

Merck, wounded by its September recall of blockbuster painkiller Vioxx over safety questions, posted its second-straight quarter with significantly lower revenues, down 9 percent this time.

Its net income plunged 59 percent to $720.6 million, or 33 cents per share, due to lost revenues from Vioxx, slumping sales of its top drug Zocor, and a whopping $740 million charge for repatriating about $15 billion in foreign profits. A year ago, net income was $1.77 billion, or 79 cents per share. Excluding one-time items, Whitehouse Station, N.J.-based Merck's operating income was $1.36 billion, or 62 cents per share.

Revenues totaled $5.47 billion, down from $6.02 billion last year, with 11 percent of the decrease coming from the lack of Vioxx sales. Sales of cholesterol reducer Zocor fell 16 percent to $1.2 billion, but higher sales of asthma drug Singulair, osteoporosis medication Fosamax and the related blood pressure drugs Cozaar and Hyzaar helped compensate.

Eli Lilly posted a quarterly loss of $252 million, or 23 cents per share, thanks to a charge of $1.07 billion, or 90 cents per share, for a product liability settlement and related costs involving Zyprexa, its top-selling anti-psychotic treatment.

A year earlier, the Indianapolis company had a profit of $656.9 million, or 60 cents per share. Excluding the settlement and related charges, Lilly posted earnings of $728 million, or 67 cents per share.

Sales of Zyprexa and the attention deficit disorder medication Strattera continued to fall, offset by revenues from a combination of eight newer products, including the new anti-depressant Cymbalta and the osteoporosis medication Forteo.

Schering-Plough Corp. posted a second-quarter loss of $70 million, or 5 cents per share, citing a charge of $259 million, or 18 cents per share, for reserves to resolve litigation related to questionable marketing practices in past years.

Excluding that, the Kenilworth, N.J., company's operating income would have been 13 cents per share, 8 cents better than Wall Street expected. In the same quarter of 2004, the allergy and hepatitis drug maker posted a loss of $65 million, or 4 cents per share.

But revenues surged 18 percent to $2.5 billion as sales of cancer drug Temodar, arthritis drug Remicade and ovarian cancer drug Caelyx all grew by 30 percent or more.

Sales of the new cholesterol drugs Schering-Plough and Merck sell in a joint venture - Zetia and Vytorin - more than doubled in the quarter, to more than $500 million.

In trading on the New York Stock Exchange, Merck shares fell 47 cents, or 1.48 percent, to close at $31.38; Lilly shares fell $1.01, or 1.8 percent, to $56.25; and Schering-Plough shares fell 9 cents to $20.11.

"There are companies that seem to be doing well - Wyeth, Schering and maybe Pfizer," which is planning a reorganization and job cuts, said Tony Butler, pharmaceuticals analyst at Lehman Brothers.

He noted results are being driven by much faster growth of drug sales outside the United States as companies get their newer drugs approved in other countries.

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AP Business writers Bonnie Pfister and Ashley M. Heher contributed to this report.

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On the Net:

http://www.merck.com

http://www.sgp.com

http://www.lilly.com

Source: Associated Press/AP Online

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