Drug Stock Fall Rattles Market; Dow Off 17.11 : Market Overview

Highlights of Tuesday’s market activity, compiled from Times staff and wire reports:

* Stocks pulled back from Monday’s record as a plunge in key drug issues unnerved many investors. The Dow Jones industrial average fell 17.11 points to 3,396.10, one day after closing above 3,400 for the first time.

* Bond yields fell slightly after the Federal Reserve unexpectedly swooped in to buy Treasury securities, adding cash to the system.

Stocks

Wall Street was stunned by drug giant Bristol-Myers Squibb’s announcement that its earnings growth in the current quarter will be in the single-digit range.

Bristol stock plummeted to close down 6 7/8 at 66 7/8, a 9.3% decline that erased $3.6 billion of the shares’ market value.

Other leading drug stocks tumbled as well in extremely heavy trading, in one of the worst sessions the industry has experienced in many traders’ memories.

Johnson & Johnson slid 5 5/8 to 92 3/8, Warner-Lambert dropped 2 1/2 to 61, Pfizer sank 3 1/4 to 71 1/2, Schering-Plough lost 2 5/8 to 50 5/8 and American Home Products gave up 4 1/8 to 72 1/4.

Bristol said its earnings growth will decline in the current quarter because drug wholesalers have ordered less for inventory. Analysts said the wholesalers are responding to drug manufacturers’ increasing inability to raise prices. With less risk of higher prices down the road, many wholesalers are lightening up on their inventories, thus reducing carrying costs.

The drug stocks--long one of the few industries to produce consistent annual earnings growth of 15% or better--had been under pressure from January through April: Some Wall Street analysts warned that the national outcry over high health care costs would force drug companies to slow their price increases, and thus their earnings growth.

But in May, many investors decided the drug stocks had fallen too low and bid the stocks up again. Now, with the latest bomb, analysts say the stocks could be poised to slide much further as investors take some of the big paper profits accumulated since the mid-’80s.

William Dodge, investment strategist at Dean Witter Reynolds in New York, said the heavy selling in the drugs on Tuesday signified “the emergence of an understanding of some earnings problems in the group.” Until now, he said, many investors have continued to believe that any drug-company problems were isolated.

Dodge believes that the Bristol news will force more investors to abandon drug stocks in favor of industrial companies whose earnings are recovering with the economy.

However, James Craig, manager of the Janus Fund in Denver, contended that there was no fundamental reason to sell such drug stocks as Pfizer, Amgen and Glaxo. All three have major new products in the pipeline that will assure good earnings growth, he argued.

Investors nonetheless seemed to take Dodge’s side Tuesday: The day’s big winners were mostly industrial names.

In the broad market, declining issues outnumbered advancing ones by about 9 to 8 on the New York Stock Exchange. Volume totaled 203.08 million shares, compared to Monday’s 190.64 million.

Among the market highlights:

* Industrial stocks rising as the drugs fell included GM Hughes, up 1 1/8 to 23; Dow Chemical, up 1 to 62 1/4; Goodrich, up 1 1/2 to 55 3/8; Allied-Signal, up 2 7/8 to 60 7/8, and Phelps Dodge, up 1 1/2 to 92 3/4.

* Food stocks eased with the drugs. Hershey lost 3/4 to 40 1/8, Heinz fell 5/8 to 37 1/8, Conagra dropped 5/8 to 25 1/2 and Coca-Cola lost 1/2 to 44 1/4.

* Strength in some high-tech stocks helped pulled the NASDAQ market higher. AST Research gained 3/4 to 18 1/4, FileNet rose 3/4 to 24 1/2, Tetra Technologies added 1 to 16 1/2 and Triconex leaped 1 1/4 to 18 1/2. But Sun Microsystems slumped 2 to 26 after brokerage Alex. Brown removed the stock from its recommended list and cut earnings estimates, citing an expected temporary revenue slump.

* Some of Monday’s big gainers gave ground, including CBS, off 2 5/8 to 202, and Waste Management, down 2 1/4 to 35 3/4.

Overseas, Tokyo stocks ended higher in dull futures-led trading, with the Nikkei average rising 121.44 points to 18,125.55.

Stocks ended with modest gains on the London exchange. The Financial Times 100-share average closed 8.3 points higher at 2,705.9. Frankfurt’s DAX average ended up 3.25 points at 1,801.39.

Credit

The Federal Reserve’s move to add cash to the banking system was viewed largely as a technical and seasonal operation. But it had the practical effect of boosting bond prices and thus reducing interest rates.

“It helped take supply out of the market,” said Douglas McAllister, a strategist at Prudential Securities.

The Treasury’s 30-year bond, down about $3 per $1,000 face value in late morning, ended the day up $2.50. Its yield eased to 7.86% from 7.88% Monday.

Bond traders said the main reason for the early weakness was a strong rise in April’s leading economic indicators, suggesting the economic recovery remains on course. A healthier economy makes it unlikely interest rates will go substantially lower.

The federal funds rate, the interest on overnight loans between banks, was 3.813%, down from 3.938% Monday.

Currency

The dollar ended mostly higher on world markets after early returns from a referendum in Denmark showed that voters rejected a treaty on European political and economic union--shocking European leaders, who expected passage.

As initial results of the Danish voting began to filter out before the market’s close, “the dollar took off,” one trader said. The dollar is often sought as a safe haven in times of confusion.

In New York, the dollar rose to 127.45 Japanese yen and 1.614 German marks, from 126.95 yen and 1.605 marks Monday.

Commodities

Strong European demand and an improving U.S. economy sent platinum futures sharply higher on the New York Mercantile Exchange.

Platinum for July settled $8.90 higher at $377.20 an ounce.

Gold and silver followed: On the Comex in New York, gold for delivery in June settled $1.50 higher at $339.30 an ounce. July silver was 3.6 cents higher at $4.08.

All three metals are widely used in industry, so a healthier U.S. economy could boost demand.

Elsewhere, energy futures were mixed on the New York Mercantile Exchange, with light, sweet crude oil for July delivery rising 8 cents to $22.11 a barrel.

Market Roundup, D6