Jenks Healthcare Business Report February 2002

In the February 2002 issue:

Fourth Quarter Earnings: A Mixed Bag?

While the rest of corporate America is struggling with disappointing year-end profits, the health care sector ended the year in reasonable shape. Even though some of the large pharmaceutical companies will see a flat year in 2002, the generic drug companies will more than make up for any profit shortfall. The hospital sector continues to surge with increases in admissions and revenue per admission.
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Public Equity Market

With general apprehension in the equity markets, the IPO market has virtually shut down. One biotech company managed to get priced, but at a deep discount, and two other IPO candidates postponed their offerings. The good news is that five more companies filed to go public.
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Venture Capital Market

Another strong month for venture capital fundings in the health care sector, with 20 new transactions representing a total of $261 million.
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Bankruptcy Blues

The well known e-health compamy MedicaLogic/Medscape succumbs to bankruptcy, while Phycor enters into a pre-negotiated Chapter 11 filing.
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Jenks Healthcare Business Report

Fourth Quarter Earnings: A Mixed Bag?

During the fourth quarter of every year, corporate America puts its dirty laundry out to air so that it can get ready for the next year, at least from a financial point of view. Write-offs are taken, warnings (if any) are issued and shareholders learn of any unusual items in the forecast. While what happened at Enron (NYSE: ENE) is rather extreme, most health care companies let shareholders know of any changed assumptions in their forecasts, especially after the September 11 tragedy. Consequently, most health care companies reported earnings that were in line with estimates, but there were a few surprises, both positive and negative, to make for an interesting past few weeks. One theme for those companies doing well, with double-digit earnings increases, is that their growth in earnings is far outpacing their revenue gains. Obviously, a CEO does not want to report the reverse trend, but for many of these companies, solid fourth quarter earnings results bodes well for 2002. For others, well…

Abbott Laboratoriess (NYSE: ABT) reported fourth quarter earnings in line with estimates, and profits rose 8.3% (before charges) on a 20% increase in revenues to $4.45 billion. U.S. pharmaceutical sales grew by 44% while international product sales jumped by 95%. Earnings growth this year is expected to be close to 20%. AstraZeneca Plc (ISEL: AZN), Europe’s second largest drug company, did a little better than expected last year because of delays in the arrival of generic versions of its drug to treat ulcers, Losec. Each day that generic versions are delayed adds $2.5 million to the company’s bottom line. The generics will come, however, and AZN has forecast a 10% drop in profits for 2002 on flat sales.

Speaking of generic drug companies, Barr Laboratories (NYSE: BRL) saw its earnings soar to $1.40 per share before charges, compared to estimates of $1.32 per share and the year-ago quarter’s earnings of $0.38 per share. The company exceeded its own earnings guidance, provided last November, by 7%. The strong results were due to a more than doubling of revenues driven by strong sales of its generic versions of Prozac and the breast cancer drug Tamoxifen.

The fifth largest drug maker, Bristol-Myers Squibb (NYSE: BMY), posted earnings per share of $0.59 before charges, in line with expectations and the same as the previous year’s fourth quarter. Things will get worse, however, as BMY expects profits to decline by 10% to 15% in this year’s first quarter because sales of its anxiety drug BuSpar and the cancer drug Taxol are forecast to slow as a result of competition from generics. The fourth quarter charges included a write-down of BMY’s investment in ImClone Systems (NASDAQ: IMCL), an investment (and relationship) that has gone from bad to worse. IMCL’s board rejected BMY’s demands to let it take over the approval process for IMCL’s new cancer drug as well as the demand that IMCL’s two top officers step aside until the drug is approved by the FDA. So far, the only ones making any money on the deal are the lawyers.

Cardinal Health (NYSE: CAH) slightly beat earnings estimates on a 17% rise in revenues and expects annual earnings growth of 20%, while Johnson & Johnson (NYSE: JNJ) posted a 23% jump in earnings on a 15% increase in revenues.

On the negative side, Eli Lilly’s (NYSE: LLY) fourth quarter profit plunged by 25% because of depressed sales of Prozac, but the results were expected. Excluding charges, Schering-Plough’s (NYSE: SGP) fourth quarter profit dropped by 7% on just a 2% revenue increase, but the company expects earnings per share will rise in the low double digits this year. Although Merck (NYSE: MRK) had an 8% increase in earnings per share on a 10% rise in revenues, the company expects little or no growth in 2002. Like its competitors, the company has been hurt by patent expirations and competition from generics.

At least the world’s largest pharmaceutical company, Pfizer (NYSE: PFE), turned in a solid quarter with a 21% jump in profits (excluding unusual items) on just a 12% increase in revenues. For the full year, Pfizer’s net income more than doubled to $7.8 billion on a 10% increase in revenues to $32.3 billion. The company spent $4.8 billion on R&D in 2001, which should increase by 10% this year, and expects to submit 15 new medicines for regulatory review.

In the biotech arena, gene chip maker Affymetrix (NASDAQ: AFFX) reported better-than-expected earnings, but its stock price continued to slide after a negative report came out from the buy-side consulting firm Off The Wall, recommending that investors short the stock. On a pro forma basis, AFFX was barely profitable in the fourth quarter, but expects revenue growth of 25% in 2002. The world’s largest biotech company, Amgen (NASDAQ: AMGN) posted a 25% increase in fourth quarter profits to $243 million (before charges), which was slightly below expectations. The company’s two drugs for the treatment of anemia, Epogen and Aranesp, had combined sales of $609 million in the fourth quarter, compared to $533 million for just Epogen in the fourth quarter of 2000.

Genentech (NYSE: DNA) met earnings estimates with a 28% increase (before charges), on a 24% rise in revenues to $600.2 million for the fourth quarter. DNA’s results were dominated by sales of its non-Hodgkin’s lymphoma drug Rituxan and breast cancer drug Herceptin, which had combined fourth quarter sales of approximately $325 million. Shares of Icos Corp. (NASDAQ: ICOS) dropped when the company announced it will lose more money than anticipated in 2002 as it launches a rival to Pfizer’s impotence drug Viagra. The company expects to lose between $2.70 and $2.95 per share this year, compared to an average estimate of $1.80 per share. The new drug, called Cialis, will be co-marketed with Eli Lilly, and we expect ICOS’ shares to firm up when sales begin to rise.

In the health care services segment, hospital company financial results continue to be strong across the board. It doesn’t hurt that managed care companies have opened up the purse strings in the past few years, resulting in back-to-back double-digit premium increases for consumers. The largest hospital company, HCA, Inc. (NYSE: HCA), beat estimates for fourth quarter earnings by two pennies per share with a 25% increase on just an 8.7% rise in revenues. For hospitals owned for more than a year, fourth quarter admissions rose 1.8%, but the revenue per admission jumped by 9.8%. Cash flow from operations in the quarter increased 37% to $592 million compared to last year’s fourth quarter.

Although much smaller, Health Management Associates’ (NYSE: HMA) profits for its first quarter ended December 31, 2001 rose 26% on net revenues of $495.8 million, in line with estimates. The improved results were due to higher admissions, increased emergency room visits and a rise in surgeries. An even smaller company, LifePoint Hospitals (NASDAQ: LPNT), which was spun out of HCA, posted a 68% increase in earnings per share for the fourth quarter. Same hospital admissions were up 3.6%, but same hospital revenue and EBITDA jumped 8.7% and 13.7%, respectively. The strong financial performance enabled the company to repay all outstanding bank borrowings by the end of the year. Meanwhile, Universal Health Services (NYSE: UHS) expects to report a 32% increase in earnings per share for the fourth quarter.

In the managed care sector, Humana (NYSE: HUM) slightly beat estimates with a 32% fourth quarter increase to $35.1 million. For the full year, however, revenues dropped by 4% even though the number of enrollees increased from 5.2 million at the end of 2000 to 6.4 million. UnitedHealth Group (NYSE:UNH), the second largest health insurer after Aetna (NYSE: AET), reported a 28% rise in fourth quarter profits and beat estimates by three pennies per share. The company’s shares have been trading near their all-time high.

Matria Healthcare (NASDAQ: MATR) saw its shares plunge by 30% when it warned investors the company would not meet earnings expectations. The company provides programs to manage chronic diseases, and higher costs with smaller margins at its women’s health business were the culprit. Revenues in the fourth quarter, however, are expected to be higher than management expected because of better results in its diabetes program.

Read the past headlines.