Chemical Stocks Perform Well

Investors liked chemical stocks in the fourth quarter. C&EN's index of U.S. chemical stocks continued to gain in the fourth quarter, as it had for most of the year. Pharmaceutical and biotechnology stock indexes, however, while up from the end of the third quarter, continued to lag the major market indexes such as the Dow Jones industrial average and the NASDAQ.

C&EN's index of 25 chemical company stocks ended the fourth quarter at 203.5 (all C&EN indexes are 1992 = 100), up 10.1% from the end of the third quarter. The index of nine major pharmaceutical stocks rose 4.4% to 358.5, while the index of 15 biotechnology and drug discovery companies increased 4.0% to 467.8.

Meanwhile, the Dow Jones industrial average rose 7.0% in the quarter and the NASDAQ was up 14.7%.

For the full year, chemicals did even better. The end-of-the-year index for chemical companies was 21.4% ahead of the last trading day in 2003, while the pharmaceutical index fell 5.3% and the biotech index rose 8.0%. The Dow Jones was up just 3.1% for the year while the NASDAQ increased 8.6%.

In the fourth quarter, the breadth of stock increases among the companies was much greater than it has been for some time. For instance, in the third quarter, just 13 of the 25 companies saw their share prices increase over the three-month period. In the fourth quarter, all but one--FMC Corp.--had share price rises. And FMC's stock price was down just 0.6%.

For the full year, only three companies--Ferro, H.B. Fuller and Stepan--had declines in their stock prices.

The stock price for industry leader Dow Chemical rose 9.6% for the quarter, to $49.51 per share, and was up 19.1% for the full year. Number-two-ranked DuPont, on the other hand, had a 14.6% rise for the quarter, to $49.05 per share, but only a 6.9% increase for the full year.

The improving agricultural economy helped a couple of companies in the quarter. Monsanto's stock price jumped 52.5% to $55.55 per share. And shares of Mosaic, the new combination of IMC Global and Cargill Crop Nutrition, rose 8.8% from its start of trading on Oct. 25 to finish the year at $16.32 per share. Mosaic replaces IMC Global in the C&EN index.

Downstream companies seemed to have stock price increases that were smaller than average during the quarter as investors worried about the firms' ability to pass along cost increases. For instance, shares of Arch Chemicals were up just 1.0%; Cytec Industries, 5%; H.B. Fuller, 4.1%; Hercules, 4.2%; and Rohm and Haas, 2.9%.

Donald Carson, research analyst for chemicals at Merrill Lynch, sees a continued upside for commodity chemical producers. "With the strong second-half 2004 share price performance for most commodity chemical producers, many investors are wondering whether the pending peak has been fully discounted," Carson wrote in a report issued last week. "We see an additional upside in select commodity chemicals stocks such as Dow Chemical, Lyondell, and Olin."

While the C&EN chemical index had a double-digit increase, the index for pharmaceutical companies was up just 4.4% for the quarter and down 5.3% for the full year, as many firms came under scrutiny over drug safety concerns and other problems.

Merck, which withdrew its COX-2 inhibitor Vioxx in the third quarter because of safety problems, saw its stock price continue to decline. Merck stock finished the year at $32.14 per share, down 2.6% from Sept. 30 and off 30.4% from year-end 2003.

Pfizer stock also got hit with the COX-2 bug. Its Celebrex and Bextra drugs came under scrutiny, and the company's stock price fell 12.1% in the quarter and 23.9% for the year.

Eli Lilly saw its stock decline 5.5% in the quarter to $56.75 per share, although for the full year the price was up 9.9%. Like Merck, Lilly's problems began in the third quarter when its antidepressant Prozac was linked to teen suicide, causing its stock price to fall 14.1%. The decline continued in the fourth quarter after the company issued a warning on its attention-deficit-disorder drug Strattera.

THE TWO LARGEST stock gains came at Wyeth and Johnson & Johnson, which coincidently had the two largest earnings increases in the third quarter--16.0% and 13.6%, respectively. Wyeth's stock price for the quarter rose 13.9% to $42.59 per share, although for the year it was up just 0.3%. J&J's stock price increased 12.6% for the quarter to $63.42 per share; for the year, it was down 9.8%.

For the quarter, the biotech index performed slightly below that for pharmaceuticals, rising just 4.0%. For the full year, however, it vastly outperformed the drug index, rising 8.0% against the 5.3% decline for pharmaceuticals.

Of the 15 biotech and drug discovery stocks that C&EN follows, 12 were higher for the quarter and five of these showed double-digit increases. For the full year, despite the higher percentage increase, just nine companies saw improved stock prices.

Industry leader Amgen saw its stock get off the ground and rise 12.9% to $64.15 per share in the quarter after the U.S. District Court in Massachusetts affirmed the company's erythropoietin patents.

The big loser during the quarter was Chiron, which saw its stock decline 24.6% to $33.33 per share after British regulatory officials suspended the company's license to manufacture Fluvirin influenza virus vaccine at its Liverpool facility, causing Chiron to write off the entire inventory of the vaccine. Chiron's stock price was down 41.5% for the year.

Once again, some firms with no earnings had respectable share price gains for the quarter. Celera Genomics rose 17.6% to $13.75 per share, Cytogen was up 9.3% to $11.52 per share, and Protein Design Labs increased 5.5% to $20.66 per share.

While the fourth quarter saw increases in all the indexes, what there was of a year-end rally stopped in the first week of the new year, with all three indexes moving lower. The biotech index was off 2.0% to 458.8, the pharmaceutical index was down 0.6% to 356.2, and the chemical index dropped 4.8% to 193.9.