Sector Wrap: Big Pharma

Analyst Chris Schott said top issues facing drug makers include a more cautious Food and Drug Administration and a wave of patent expirations on blockbuster drugs over the next few years. Not all companies have promising drug candidate pipelines, he added, and the sector has also been hit by concerns about the effectiveness of drugs already on the market.

Schott did name Merck his top pick, believing shares will rise as the company builds sales of its diabetes treatment Januvia and its human papillomavirus vaccine Gardasil, along with restructuring efforts that are lowering its costs. He also said Schering-Plough's buyout of Organon Biosciences--a $14.5 billion deal that closed in November--should allow the company to significantly improve its profit margins, he wrote.

Those two companies are also the most protected from a new "patent cliff"--a period where a large number of valuable drugs go off-patent--between 2010 and 2012, he said.

Shares of Schering-Plough ended up 40 cents, or 2.1 percent, at $19.73. The stock is off 26 percent year to date. Despite the positive comments from Schott, Merck ended a nickel lower at $36.98 Wednesday, after the FDA rejected expanding use of Gardasil to older women. The stock is down 36 percent since January.

Schott is "Neutral" on Bristol-Myers Squibb Co. and Pfizer Inc. because some of their most important drugs will lose patent protection over the next few years. He thinks Wyeth's portfolio is lean beyond Alzheimer's drug candidate bapineuzumab, and said Eli Lilly & Co.'s pipeline consists mostly of early-stage drugs. Schott isn't convinced they can replace the top-selling products that will lose patent protection over the next few years.

Wyeth shares slipped 10 cents to finish at $47.03, up 6 percent year to date. King Pharmaceuticals Inc. rose 38 cents, or nearly 4 percent, to $10.24--the sector's top gainer Wednesday and flat year to date.

European drugmakers AstraZeneca, GlaxoSmithKline and Sanofi-Aventis all edged up slightly Wednesday; the stocks are down 11 percent to 26 percent over the past six months.