Stock Commentary - New York week to Feb 13, 2006

NEW YORK: equities started the reporting week to February 13 with a bout of profit-taking in oil stocks, but were then boosted by a range of news, leaving the Dow Jones up 0.8% overall. Pharmaceutical and biotechnology stock were generally lower, with 18 of those tracked rising and 25 falling.

The news on February 8 that drugs giant Pfizer was considering the sale of its consumer health care business boosted that stock 5% and fueled rises in others such as Johnson & Johnson and Procter & Gamble. However, Pfizer disappointed the market with its presentation to analysts ahead of the weekend, when it fell 2.5% after forecasting 2006 profits below consensus expectations (see page 3), but was still up 1.9% overall. Genentech plunged 7.0% on the news that Swiss majority owner Roche was suspending a Phase III clinical trial of its cancer drug Avastin (bevacizumab) due to safety concerns (see page 21). While most analysts felt there was no immediate concern for alarm, the drop in the stock price indicated the value that investors put on increasing sales of the drug and its relationship to Genentech's growth prospects. Baxter stock rose 3.7% on positive news from a clinical trial for Hylenex, a liquid injectable formulation that includes recombinant human hyaluronidase. Forest's stock fell 4.3%, as investors absorbed the effect of two recent marketing deals that will mean lower earnings in this year's fourth quarter and the fiscal year ending March 1. The agreements call for upfront payments to two companies during the quarter, which will boost Forest's R&D expenses to $405.0 million from $285.0 million. The payments are booked as R&D expenses because the drugs covered in these transactions are still experimental.

Cost-cutting through layoffs and plant closures will not solve the drug sector's problems long-term, according to analysts, who are skeptical of companies taking this route. The real problem is a lack of new blockbusters to offset generic competition and drugs withdrawn for safety reasons, they note, all agreeing that this is a very tough time. What firms need to do is increase R&D spending, to create value with innovative new products, they say.