Big Drug Manufacturers Fill Prescription For Comeback

The big drug companies are pleasing investors again, after singing the blues for nearly three years. Sales and profit are stronger at most companies, but the improved results are especially sweet for SmithKline Beecham PLC, a British-American company based in London that is emerging from difficult times.

After the patent expired last year on Tagamet, SmithKline’s strong-selling ulcer treatment, low-priced generic versions invaded the market. As a result of the increased competition, analysts projected flat or lower earnings in the fourth quarter.

But SmithKline surprised them, reporting that overall sales rose 12 percent with the help of a raft of new products and that earnings per share were up 6 percent.

“I expected earnings to go down,” said Neil B. Sweig, an analyst at Ladenburg, Thalmann & Co. who recently added SmithKline and most other big drug makers to his buy list.

The pharmaceutical industry is beginning to see payoffs from deep cost-cutting - plant closings, consolidations and layoffs.

And drug prices are starting to creep up as the pressure on prices eases from governments and big private buyers. Ronald Nordmann of Deerfield Management in New York, a health care hedge fund, called the rising drug prices “encouraging”

There has also been a temporary bonus for multinational companies that sell heavily in Europe and Japan, where the dollar has weakened and the low exchange rates swelled sales. But companies that do business in Latin America have been hurt by the peso.

Pharmaceutical stocks rose sharply in January and February, well ahead of market averages, because demand for the companies’ products continues in good or bad times.

“As a slowing economy becomes a greater threat, investors will continue to increase their holdings in pharmaceuticals,” said Larry Puglia, a manager of the Blue Chip growth fund at T. Rowe Price.