Call them the miracle drug stocks.
No longer considered mere defensive salves, they have the power to revitalize your portfolio.Because of hot-selling new products designed to grow hair, steady heartbeats, snuff viruses or improve male sexual prowess, these sophisticated companies' earnings are growing significantly faster than those of the Standard & Poor's 500.
As in so many other industries these days, there's takeover potential, exemplified by the proposed merger of SmithKline Beecham and Glaxo Wellcome to form the world's largest pharmaceutical company. Competing with giants, smaller companies may increasingly have to be molded onto larger ones.
Who's next? Among those mentioned as possible targets in future deals are American Home Products (which saw its own attractive deal with SmithKline Beecham go up in smoke with the Glaxo agreement), Warner-Lambert, Schering-Plough and Eli Lilly.
Discussed among potential acquirers are Roche (a European company that would like to acquire a U.S. company with strong over-the-counter presence), Merck & Co., Pfizer Inc. and Bristol-Myers Squibb.
But apart from such merger hocus-pocus, there are plenty of good things to say about the high-flying drug stocks these days.
"We've been recommending a portfolio overweighting of large-capitalization pharmaceuticals for a number of years and they've done extremely well," said Kenneth Nover, pharmaceuticals analyst with A.G. Edwards & Sons in St. Louis.
Despite the fact that drug stocks tripled in price over the past three years, Nover expects them to outperform the overall market once again this year. He forecasts earnings-per-share gains for the group of 16 to 18 percent in both 1998 and 1999.
"Business fundamentals and the new product flow for U.S. pharmaceuticals are very strong and nothing near-term will change that," predicted Jeffrey Chaffkin, phar-ma-ceu-ticals analyst with Paine-Webber.
Yet the other part of the equation is that, in his opinion, stock valuations are already quite high. That means you must be picky in your choices.
"Dynamics in pharmaceutical companies are robust and they now have the ability to advertise directly to consumers, which should lead to expansion in the group," asserted James Flynn, pharmaceuticals analyst with Fur-man Selz.
Drug companies are learning to better manage inherent risks, such as patent expirations, he pointed out, while advances in the drug discovery process should lead to a surprising number of new molecules and products in the future.
Here are the top drug stock choices based on fundamentals and price potential:
Warner-Lambert, expected to post a 35 percent earnings gain this year and average more than 20 percent over the next several years, is recommended by Chaff-kin, Flynn and Nover. Its key sellers are Lipitor, a cholesterol drug, and Rezulin, a diabetes drug, both of which have sold even better than analysts expected.
Pfizer, launching its new Viagra oral treatment for male sexual dysfunction, is recommended by Flynn and Nover. Other popular new products are Trovan, a powerful antibiotic for drug-resistent infections, and Zeldox, a product for schizophrenia. All three products have the potential to become billion-dollar sellers. Also in the pipeline for 1999 and 2000 are Xelide for arrhythmia and Eletriptan for migraine headaches.
Schering-Plough, a well-managed company which has consistently performed at the high end of the group, is recommended by Chaff-kin and Nover. For a smaller company, it has put together a strong product pipeline. Biggest products are Claritin, the non-sedating allergy drug that has captured more than 50 percent of the worldwide market; Intron A, an interferon alpha used for many different viruses and cancers; and Rebetol, another anti-viral medication.
Merck, a long-time favorite which is launching four important products this year, is a selection of Flynn and Nover. Its Singulair for asthma, Maxalt for migraines, Propecia for hair growth and Aggrastat for treating unstable angina each have more than $250 million in sales potential.
Bristol-Myers Squibb, which features the AIDS products Zerit and Videx, is recommended by Chaffkin. It's also had success with its Glucophage oral diabetes drug and Pravachol cholesterol drug.
American Home Products, an undervalued stock because of liability tied to its Redux and Pondimin anti-obesity drugs, is suggested by Nover. It has a good drug pipeline thanks to upgrading its in-house research, the purchase of the Genetics Institute biotechnology company and the fact that it owns 54 percent of the Immunex bio-tech firm.