Stocks Advance

The third quarter was a period of recovery for C&EN's chemical, pharmaceutical, and biopharmaceutical stock indexes after a decline for all three in the prior three-month period. Broad indexes such as the Dow Jones industrial average and the NASDAQ also improved after the second quarter, when the Dow Jones showed only modest growth and the NASDAQ, where most biotech stocks are traded, fell.

During the quarter, stocks of all stripes were helped by a number of external factors, including falling oil and natural gas prices and the Federal Reserve Board's decisions in August and September not to raise interest rates. Both of these signaled to investors that inflation is not an immediate concern and that consumers will continue to spend money.

Thus, the Dow Jones finished the quarter at 11679.1, up 4.7% from its second-quarter close and 9.0% ahead of where it had been at the end of 2005. The NASDAQ, meanwhile, was up 4.0% from its June 30 level, but this more volatile index was only 2.4% ahead of where it had been at the end of December last year.

The C&EN indexes followed suit. The index of 25 major chemical companies closed the third quarter at 215.5 (all C&EN indexes are 1992 = 100), up 2.7% from the end of June. It was up 9.9% from the end of 2005, ahead of the 9.0% rise in the Dow Jones. The index of nine drug companies had the best performance of the three groups, rising 11.4% in the quarter and 13.4% year-to-date to 393.9. The biotech index, despite improving 5.4% in the quarter to 550.6, was still down 3.0% from where it had been at the end of last year.

The third quarter was not looking good for chemical stocks back in July, when the index dropped 4.6%. But this was a time of still-rising oil prices, and investors were worried about declining margins in the industry. This sentiment was especially strong after Dow Chemical revealed on July 27, as part of its second-quarter earnings announcement, that its full-year 2006 earnings would be below what the company earned last year. But the index rallied, rising 3.6% month-to-month in August and 4.0% in September.

The improvement in stock prices was widespread among the 25 chemical companies, with 18 showing higher and six having lower valuations. One company, Eastman Chemical, showed no measurable percentage change.

The largest percentage increase of the 25 companies was at fertilizer producer Terra Industries, whose stock rose 21.0% to $7.71 per share. Fellow agricultural chemical maker Mosaic saw its stock price rise 8.0% in the quarter to $16.90 per share.

The largest decline in the quarter among the 25 firms was at Arch Chemicals, whose stock was down 21.1% to $28.45 per share. Most of this decline came on Aug. 1, the day that Arch announced its second-quarter earnings. Analysts were expecting the company to report earnings of $1.27 per share, and when they came in at a disappointing $1.22, Arch's stock price dropped 17.7%.

Industry leader Dow Chemical also had a bad day when it announced second-quarter earnings: Its stock price dropped 10.0% to $33.34 per share. By the end of the third quarter, however, its stock price had recovered to $39.98 per share, up 2.4% from the end of June.

Drug companies generally enjoyed a good quarter, with eight of the nine firms that make up the index turning in stock market gains. The exception was Bristol-Myers Squibb.

The index began the quarter with a 6.8% increase in July over the end of a relatively depressed second quarter. Growth then slowed with month-to-month increases in the index of 1.4% in August and 2.9% in September. The index finished the quarter at 393.9, which was also its high for the three-month period.

The largest gain for the quarter was at Baxter International, which enjoyed a 23.7% increase in its stock price to $45.46 per share. This was off a poor first half for the company. Baxter's September closing price was up only 0.2% from the end of 2005.

Pfizer also saw good stock performance in the quarter, increasing 20.8% from June 30 to $28.36 per share. Year-to-date, Pfizer's stock was up 21.6%, an indication of an almost flat first half.

The departure of Bristol-Myers Squibb's top executive did not seem to allay problems at that firm. Despite the firing of CEO Peter R. Dolan over a botched patent agreement allowing Canadian generic producer Apotex to market its version of the blood thinner Plavix five years ahead of schedule, Bristol-Myers' stock languished, falling 3.6% from the end of June to $24.92 per share.

Like the drug index, the biopharmaceutical index ended the three months at its high for the quarter of 550.6, up 5.4% from the second quarter. But unlike the chemical and drug indexes, the biotech index had slow, steady growth for the quarter, logging month-to-month increases of 1.1%, 1.2%, and 3.0% in July, August, and September, respectively.

Of the 14 biotech companies making up the index, 10 had higher stock prices than they did at the end of the second quarter. But when compared with the end of last year, just six were better off.

Amgen, the largest company in the index, saw its stock price rise 9.7% in the quarter to $71.53 per share; still, it was down 9.3% for all of 2006. Amgen got good news toward the end of the quarter when the Food & Drug Administration granted approval for Vectibex, which will compete with ImClone Systems' Erbitux in the treatment of colorectal cancer.

Four biotech firms showed double-digit increases in the quarter. Gilead Sciences' stock was up 16.2% to $68.77 per share, Icos' was up 14.0% to $25.06 per share, Xoma's was up 11.2% to $1.89 per share, and Genzyme's rose 10.5% to $67.47 per share.

In the first week of the fourth quarter, most of the indexes continued their gains. The Dow Jones closed at a record high of 11866.7 on Oct. 5 then declined to 11850.1 on Oct. 6 to close the week up 1.5% from the end of the third quarter. And the NASDAQ closed the week at 2306.3, up 2.1% from its end-of-September close.

Meanwhile, the chemical index gained 1.3% to 218.3 and the biotech index gained 2.4% to 563.6. The pharmaceutical index, however, fell 0.4% to 392.4.