Chemical Stocks Continue to Rise

The third quarter generally was not kind to the U.S. stock market, as the major indexes fell from levels seen at the end of the second quarter. Chemicals, however, more than bucked the trend. C&EN's index of average prices for 25 chemical company stocks increased 2.1% in the quarter to 184.8 (all C&EN indexes are 1992 = 100). In contrast, the Dow Jones industrial average fell 3.4% to 10080.3, the Standard & Poor's 500 was off 1.9% to 1114.6, and the NASDAQ fell 7.4% to 1896.8. The high for the chemical index occurred on the final trading day of the quarter.

Chemical stocks, on average, also outperformed share prices at major pharmaceutical companies and at biotechnology and drug discovery firms. C&EN's biotechnology index fell a whopping 8.8% to 418.4, a larger decline than that of the NASDAQ, where most biotech stocks are listed.

And the index for nine major drugmakers declined 7.5% to 343.2, although about half of this decline came from a 28.6% plunge in Merck's stock price on the last trading day of the quarter--the day the company announced that it was withdrawing its COX-2 inhibitor Vioxx from the market (C&EN, Oct. 4, page 8).

But chemicals were the stars in the third quarter, just as they had been in the previous three-month period and for 2004 as a whole. For the first nine months of this year, the chemical stock index increased 10.2% over the closing index for last year, while other indexes fell. The pharmaceutical company index was down 9.3%, the biotech index was off 3.4%, the Dow Jones declined 3.6%, and the NASDAQ dropped 5.3%. The S&P 500 managed to squeak out a 0.2% gain.

Improvement in the chemical stock index between the end of the second and third quarters does not mean that stock prices rose at all companies. In fact, just barely over half of the 25 companies saw their share prices rise in the quarter. But there was significant growth at many of the companies: Eight of the 13 companies showing improvement had double-digit increases.

The largest percentage increase in stock price was at W.R. Grace, which rose 52.4% to $9.45 per share. The company is reaping the benefits from improved earnings; settlement of a lawsuit with Honeywell over chromium contamination of a New Jersey plant site; and the possibility that sooner or later the government will act regarding suits against companies that manufactured, sold, or used asbestos in the past--the issue that drove Grace into bankruptcy in the first place. For the first nine months of the year, Grace's stock rose 267.7%.

Crompton, another company that has been suffering legal problems--in its case, over price-fixing in rubber chemicals--finally got a break in the quarter, with its stock price increasing 50.6% to $9.49 per share.

An improving agricultural economy has helped fertilizer producers, and the one such firm in the C&EN index, IMC Global, took part. IMC's stock price rose 29.8% during the quarter to $17.39 per share.

The largest decline among firms making up the chemical index was at Ferro, which has discovered accounting irregularities and, as a consequence, has yet to issue an earnings report for its second quarter. Ferro's stock price declined 18.3% to $21.81 per share.

The two largest chemical companies, Dow Chemical and DuPont, went in opposite directions. Industry leader Dow's stock price rose 11.0% to $45.18 per share, whereas DuPont's share price fell 3.6% to $42.80.

While many chemical companies were posting large stock price gains, pharmaceutical companies languished. Unlike the chemical firms, companies in the drug index saw no double-digit stock increases. Bragging rights, if there were any, for the best increase would go to Abbott Laboratories, whose stock price limped upward 3.9% to $42.36 per share. Abbott was followed by Wyeth, up 3.4%; Schering-Plough, up 3.1%; and Johnson & Johnson, up 1.1%. The rest of the companies all saw their stock prices fall during the quarter.

Apart from Merck, Eli Lilly had the largest decline--14.1% to $60.05 per share--as concerns mounted over the role of antidepressants in teen suicides (C&EN, Sept. 27, page 21). Lilly is the manufacturer of Prozac. Pfizer fell 10.7% to $30.60 per share amid investor concerns over its drug pipeline and generic competition.

But the big news was Merck. On the day before its announcement that it is withdrawing Vioxx, which has about $2.5 billion in annual sales, Merck's stock was limping along with many other drug stocks, already off 5.1% from the end of the second quarter. But Sept. 30 sent it reeling, knocking 28.6% off the closing share price of the previous day.

The result was a blow for Merck, and also for the drug stock index. On the previous day, the index had been down for the quarter by about 3.6%, but it finished the quarter off 7.5%. Put another way, excluding Merck, the index would have been off by about 4.0% for the quarter.

But, if pharmaceuticals were bad, biotech was even worse: The index fell 8.8% from the end of the second quarter. Of the 15 companies that make up the index, stock prices fell at 10, sometimes significantly and sometimes seemingly with no reason. One of the problems with biotech stocks is that most are traded on the NASDAQ, and many of those companies--especially the smaller, more speculative firms--get caught up in any broad technology downturn.

But sometimes, there are reasons. For instance, Xoma has seen its revenues drop from some $2.26 million in the second quarter last year to just $778,000 in the same period this year. At the same time, its losses have gone from $16.1 million to $21.0 million. This may well contribute to the 48.2% decline in the company's stock price to just $2.32 per share.

Unlike the smaller biotech firms, the largest seem to have stock activity that is more stable and somewhat akin to that of the traditional drug companies. For instance, biotech leader Amgen's stock price rose 4.1% in the quarter to $56.81 per share. Two other large companies had price declines, but they were within reason. Genentech's stock price fell 6.7% to $52.42 per share, while shares of Biogen Idec declined 3.3% to $61.17.

MORE ON THIS STORY
CHEMICAL STOCKS
Growth in chemical company share prices continued to beat the Dow Jones in the third quarter
Table 1 - Chemical Stocks Continue To Rise
C&EN's biotech index falls, while the drug index is battered by plunge in Merck's stock price
Table 2 - Drug And Biotech Stocks
Pharmaceutical stocks performed less poorly than did biotechs