Investors Punish Three Drug Firms for Ongoing Woes

Investors were greeted Thursday by another unwelcome reminder of what a difference a year has made in certain segments of the health-care industry, as three companies--Eli Lilly & Co., Bristol-Myers Squibb Co. and Baxter International Inc.--reported a wide range of ongoing problems.

Lilly executives acknowledged in its second-quarter earnings report that manufacturing and quality-control problems cited by the Food and Drug Administration in November would significantly slow production of several new drugs as the company wrestles to meet federal requirements.

The company also reported that net income for the quarter was down 20% to $659 million, or 61 cents a share, compared with $828 million, or 76 cents, a year ago. It was Lilly’s third consecutive earnings decline of 20% or more.

“We still have more work to do, especially at certain Indianapolis facilities,” said Lilly Senior Vice President Pedro P. Granadillo, later adding that Lilly needed to continue to refine its quality standards and “improve our ability to find the root cause of manufacturing deviations.”

Lilly reported that net sales were down 9% in the quarter, to $2.78 billion. The company also lowered its 2002 earnings forecast to $2.60 to $2.62 a share from $2.60 to $2.65.

Lilly shares finished the day at $48.54, down $2.36, or 4.6%, on the New York Stock Exchange.

Meanwhile, it appeared that Bristol-Myers Squibb was about to lose a long-running battle to gain FDA approval of its new high-blood-pressure drug, Vanlev. FDA medical reviewers Thursday said the drug should not be approved because of safety concerns. An FDA advisory panel is scheduled to take up the Vanlev matter today to recommend approval or denial of the drug.

The company will release its second-quarter earnings next week.

Bristol-Myers shares Thursday plummeted 6.8% on the NYSE, down $1.63 to $22.50.

But investors delivered the sharpest rebuke of the day to Baxter International, sending shares of the health-care products company down $11.41, or 26.3%, to $32 on the NYSE. That followed news that Deerfield, Ill.-based Baxter posted disappointing sales in the second quarter and took a large charge related to its acquisition of Fusion Medical Technologies, along with a $70-million charge for the decline in market value of minority stakes it holds in two public companies.

Baxter reported net earnings of $200 million, or 32 cents a share, down from $253 million, or 42 cents, last year. Sales rose 8% to $2.02 billion, but were $100 million short of estimates.

One year ago, Lilly was touted as one of the big drug companies best prepared to weather the end of patent protection for a blockbuster drug--in Lilly’s case, Prozac. Second-quarter sales of Prozac products declined 72% from last year, to $195 million. Analysts had praised Lilly’s ramped-up research and development as well as a pipeline of promising new drugs.

Instead, Lilly’s would-be blockbuster, Xigris, for treatment of bloodstream bacterial infections known as sepsis, posted another flat sales quarter of $23 million, far from the full-year 2002 sales projection of $600 million.

“In all candor, we thought that new products might come out sporadically next year, but they might not get any new products next year. The mantra is uncertainty,” said SG Cowen Securities analyst Stephen Scala. “Hopefully, they will be back on track in 2004.”

Bristol-Myers’ outlook for a reversal of fortune with Vanlev are so bleak that analysts didn’t even wait for a final decision from the FDA. “We’ve all reduced our Vanlev profit numbers to zero because the drug has problems. We are anticipating no future profit,” said Morgan Stanley analyst Jami Rubin.

One year ago, Bristol-Myers reported a 10% rise in quarterly profit to $1.1 billion, or 56 cents a share, driven by cost-cutting and robust sales of drugs such as Glucophage for diabetes and the anti-clotting drug Plavix.

But the company was about to formalize its biggest blunder, an ill-fated $2-billion purchase of the rights to market the anti-cancer drug Erbitux, made by ImClone Systems Inc. That deal now is facing regulatory scrutiny, along with a new Securities and Exchange Commission investigation of Bristol-Myers’ use of sales incentives that boosted revenue by $1 billion last year.