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Drug Stocks Perform Well During Difficult Times

Posted October 1, 1998

— Where do nervous stock investors go when markets are trying with all their might to turn bearish -- as these clearly are? My answer: take drugs.

I don't mean you should swallow a Valium, though that might seem a good idea on some days. What I'm saying is that drug stocks might be a good investment going forward.

A Salomon Smith Barney analyst has found that during the 11 bear market cycles since 1960, drug stocks have outperformed the S&P 500 eight times. They tied twice, and the drug sector fell below the S&P 500 on a single occasion.

It shouldn't surprise you to learn that folks don't quit buying medicine during rough economic times. In fact, an argument could be made that they buy more. I've kept my eye on two companies in this sector over the past several weeks. One of the companies is based in North Carolina. The other company has a major facility here.

I've enjoyed what I've seen. You're already aware of one of them, Cambridge, Mass.-based Biogen (BGEN/Nasdaq), if you read this column about six weeks ago. I mentioned then that the stock was rated a "buy" at a price of $58 5/16. Biogen has since risen as high as $68 5/8.

In the September 7 issue of my weekly financial newsletter, I observed that Research Triangle Park-based Medco Research (MRE/Amex) was rated a buy at $18 3/8. It since has risen to $21 1/2.

Keep in mind that the upward price momentum in both of these stocks was against the grain of a downward and volatile market. You might want to check out this sector going forward. Analysts say the drug sector is expected to record an 18.7 percent gain in earnings during the third quarter while most other sectors struggle.

Another factor to keep in mind is that most of these companies have low exposure to Asian and Latin American markets.

Now, let's take a closer look at Medco. This company is a tiny player in the pharmaceutical industry that's populated by giants. Medco does not even attempt to develop new drugs.

Rather, it shops around at universities and research centers to find incubating cardiovascular drugs that have potential, buys the compound and sponsors the testing needed to bring the drug to market. Once approved for market, Medco licenses the manufacturing and marketing of the drug to corporate partners in exchange for fees and royalties.

The company's flagship products are Adenocard, an injection drug used to treat rapid heartbeats, and Adenoscan, a drug used to diagnose damage from coronary artery disease.

I see plenty of numbers to like about Medco, but bottom line: This company is producing impressively rising revenue and earnings with zero debt.

From 1993 to 1995, MRE poured substantial sums into R&D and thus was unprofitable for all of those years. That began changing in 1996, when the company earned $4.3 million on $13.5 million in revenues. The next year, 1997, was even more impressive: Revenues up 49 percent to $20 million and earnings up 136 percent to $10.2 million.

And the beat goes on: On July 14, MRE reported net income of $5.22 million for the second quarter -- up more than 50 percent over last year's $2.3 million. The single analyst following MRE rates it a "buy" and projects a 21.6 percent rise in earnings this year.Here's a heads-up: Now that incentives have gained the blessing of the General Assembly for use by state industrial recruiters, look for local communities to get into the bidding game.

In High Point, for example, local leaders are considering a $500,000 cash incentive to entice giant Polo Ralph Lauren to locate a customer service center with 600 new jobs there. Also in the chase is a similar-sized city in Virginia.

And in the Triangle, talk is bubbling that Wake County might get into these bidding wars. Insiders tell us the political and economic climate isn't right for this to happen now. But if High Point fires a volley, don't be surprised to hear the "self-defense" argument surface.

Have a prosperous week. Dale Gibson is a Raleigh-based journalist who publishes The Gibson Report, a weekly electronic newsletter focused on North Carolina business. Questions or comments may be directed to him by e-mail at dale@gibsonreport.com or by phone at 919-834-1033.


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