PRE RESULTS COMMENT
What a Difference a Quarter Makes
■Mega-mergers have re-defined the sector. Entering 2009, questions hung
over the US pharma sector as investors wondered how the companies would
manage their way through the impending patent cliffs. One quarter later, 4 of 8
companies have materially changed their future outlook through the PFE/WYE
and MRK/SGP transactions. Of the remaining 4, questions on future strategic
maneuvers are now most prevalent for BMY and LLY, as those two companies
have steep patent cliffs that they need to still navigate.
■Earnings will matter. 1Q 09 earnings will provide insight into the security of
pharma earnings, versus significant earnings uncertainty across much of the
economy. While questions will remain regarding further sector consolidation and
the potential impact of health care reform, earnings will help illustrate whether
pharma can maintain its defensiveness during the current economic slowdown.
■Negative Fx impact may offset price increases. Our companies continue to
take aggressive price increases, as they seem to be squeezing as much out of
their assets as possible before US health care reform more significantly impacts
their pricing power. The continued negative impact of Fx, however, is offsetting
the benefits, and we expect negative year-over-year (YoY) EPS growth for the
sector as a whole, with only ABT, BMY and LLY showing positive YoY growth.
■ABT’s recent weakness may provide near-term buying opportunity. Soft
Humira Rx trends, questions about the long-term value of the lipids franchise and
the rationale for its potential bid for WYE have sparked a recent sell-off that
could reverse based on 1Q results. Our sense is that investor expectations on
Humira may have bottomed and that the stock may have been overly punished,
with an 18% decline year to date, of which 7% has occurred since March 31.
■Our Q1 estimates generally fall close to consensus, except for PFE and
WYE, where we are 4.9% and 5.1% below. Consensus for these is less reliable
than others due to the PFE/WYE deal and company guidance changes, as some
brokers remain restricted and some are differentially incorporating these effects.
■Model updates. In advance of earnings, we have fine-tuned our company and
market models, with the resulting EPS changes: ABT: 2009 remains at $3.69
and 2010 remains at $4.13. BMY: 2009 old $1.91, new $1.98; 2010 old $2.16,
new $2.17. JNJ: 2009 old $4.45, new $4.48; 2010 old $4.94 to $4.92. LLY: 2009
old $4.15, new $4.14; 2010 old $4.43, new $4.45. MRK: 2009 remains at $3.19;
2010 old $3.18, new $3.19. PFE: 2009 old $1.86, new $1.92; 2010 old $2.08,
new $2.10. SGP: 2009 remains at $1.77; 2010 old $2.04, new $2.03. WYE:
2009 old $3.50, new $3.49; 2010 old $3.52, new $3.53. We maintain the same
target price and rating for each of our names, until after they report 1Q results.