Ahead of second quarter earnings results, we sat down with Zacks senior drug industry analyst Jason Napodano, CFA to find out what he expects from this group in the weeks to come.

What are your general expectations ahead of second quarter earnings?

I think the second quarter for pharma is going to be good - not great. Better than things have been in the past, but nothing stellar. When we're talking about large pharma, we're talking about the U.S. pharmaceutical companies: the Mercks (MRK), the Pfizers (PFE), the Bristols (BMY), the Johnson Johnsons [JJ] (JNJ); I also include the European manufacturers: Glaxo (GSK), Novartis (NVS), AstraZeneca (AZN).

I'm looking for about 6% revenue growth composite over the whole group, and about 4-5% earnings growth - so a little less earnings than revenue growth, but in some instances that revenue growth has been driven by acquisitions; they'll get a bump to their top line but maybe take a hit on their bottom line, due to write-offs or cost-cutting. If you were to acquire a biotech company, say, that's losing money but has revenues, that can obviously increase their percent revenue growth with lower year earnings growth.

And obviously, within that, there are wide swings: Lilly (LLY), Abbott (ABT) and JJ are, I think, three companies that will post double-digit revenue growth, whereas companies like Pfizer and Merck, and maybe Bristol and Glaxo, are going to be hovering around even to potentially down.

You brought up the acquisitions aspect of these large-cap companies. Can you break down a little bit how you see this working out for some of the bigger players?

You know, there are companies out there that have been very acquisitive over the past couple years, and then there are companies that have not been. We happen to be positive on some of the companies that have been more aggressive.

We have a Buy on Abbott Labs, and they have been very acquisitive, I would say, over the past several years. About two years ago they acquired the vascular business from Guidant, and that has really done an excellent job to accelerate their both top-line and bottom-line growth. This is the stent business that Guidant had to sell before they would be acquired by Boston Scientific (BSX). So far, this has been a fantastic acquisition for Abbott. And last year, Abbott acquired Kos Pharmaceuticals, which expanded their offering in the cholesterol market.

So that's two acquisitions right there by Abbott that have really helped the company accelerate the top line. The Kos deal is also something that should really pay off on the bottom line in a couple of years, when the products come to market and start to be earnings contributors. The vascular business is already contributing, and we think it is only going to get better.

What other success stories would you note at this time?

Sure. Another company that has been very acquisitive is AstraZeneca. This is a company that needed to be acquisitive because it didn't have the strongest late-stage pipeline. But management knows this, and they showed their smarts by being aggressive, doing a slew of deals recently - they've probably done the most deals in pharma over the past few years.

They acquired Cambridge Antibody Technology, a leading developer of antibody solutions, about a year and a half ago. And they just closed the MedImmune acquisition a couple months ago, which was a very large, multi-billion dollar deal which took them into the vaccine business. MedImmune is the developer of a vaccine for a disease called RSV, respiratory syncytial virus. AstraZeneca is now going to control 100% of that. MedImmune also has cancer vaccines in development, and they also have FluMist, which is a flu vaccine. So with this one move, AstraZeneca has kind of catapulted itself into the vaccine market and complemented a lot of the antibody solution work that they got when the acquired Cambridge.

A lot of the things this company has done outside of these two acquisitions have been very small technology licensing kinds of things - early- to mid-stage products - so a lot of the things they've done probably won't pay off until potentially even the next decade, 2009 or 2010 or beyond. But the company is putting cash to work and making smart acquisitions, and these are the kinds of things we like to see.

So do you have a Buy recommendation on AstraZeneca at this time?

I have a Hold on AstraZeneca; I had a Buy on it for a very long time - pretty much all of last year and most of 2005 - but the stock hit our price target, so we downgraded it to a Hold. It's been hovering around that level since then, but if it pulls back, we probably would be recommending the stock again. It's one of those names we've liked in the past and we like what they are doing, and we're just looking for an opportune time to more aggressively recommend the name.

What Big Pharma companies have not kept up the pace in this current acquisition cycle?

That's a good question. Pfizer is the first name that comes to mind. This company should maybe report negative revenue and earnings growth for the second quarter. We're looking for -2% revenue growth and -1% earnings growth, and that earnings figure could probably swing pretty wildly depending on how sales of Lipitor do, and how much their 'Adapt to Scale,' which is their cost-cutting initiative, has accelerated.

Nevertheless, we don't expect to be impressed with their second quarter report. And this is a company sitting on something like $34 billion in cash, which they're really not putting to use. They've earmarked $17 billion for buybacks and $17 billion for deals. Buybacks are great because they artificially make the earnings per share go up, and there's buying pressure on this stock that could build a bit of momentum for the shares. But $17 billion is an awful lot of money, and I don't know that buying back stock is really the best use of that cash right now.

And even though there's $17 billion allotted for deals, we haven't seen anything close to that so far. They've done some small, less than billion-dollar deals, and some technology and licensing stuff, but they're lagging behind. They haven't done anything on the order of Abbott or JJ or AstraZeneca have done, even Sanofi (SNY) or Glaxo, in my opinion. And it's strange because they are the largest company and have the most cash; they shouldn't be falling behind, they should be leading the pack. With $17 billion, the company could go out and buy up some good, profitable biotech like Gilead (GILD), Biogen (BIIB) or Celgene (CELG)