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Stock of the Day (Archive)
May 27, 1998
Pfizer: When Cooler Heads Prevail...
The way investors have rushed into, and now out of, Pfizer (NYSE:PFE - news) is reminiscent of Keystone Cops running into a cave in fast-motion, then immediately running back out chased by an angry bear (the animal irony is icing on the cake here). The recent frenzy in Pfizer was sparked by the unprecedented launch of its anti-impotence pill, Viagra, and the subsequent concerns about side effects and safety. In times like these, investors often find opportunities created by the emotion and overreaction.
At least one salient point deserves consideration: Pfizer's future depends on much more than just this one drug. Indeed, Viagra may account for less than 6% of Pfizer's total revenues in 1999. This estimate even assumes a rapid and sustained ramp-up in Viagra sales to $1 billion by next year, far sooner than most analysts ever expected (a few months ago, most analysts estimated '99 Viagra sales of just $200-$500 million). Now there's talk about the drug turning into a $5 bln or even $10 bln product a few years down the road, but those projections are rather speculative. There's simply no telling how often people will use an anti-impotence pill over time, nor how much insurance coverage will limit it, nor how Viagra will fare once competing products hit the market (several are expected in the next few years).
The point here is that while Viagra is off to a roaring start, the product's significance (good or bad news) to Pfizer's overall performance seems to be greatly exaggerated by the stock price. Shares of Pfizer soared from $86 in mid-March (a few weeks prior to the Viagra launch) to a high of $121.75 last month amid news of explosive demand, adding an astonishing $46 billion to Pfizer's market value in the span of a few weeks. Now the stock price has fallen nearly $19 due to concerns about side effects (temporary vision problems, headaches) and last week's reports of six deaths among Viagra users.
The FDA is investigating, which is standard procedure, but there is no indication that the deaths were caused by Viagra. Pfizer reiterated its long-standing warning that Viagra should not be used by patients taking nitrates such as nitroglycerin, taken for some heart conditions.
Considering that over one million prescriptions of Viagra have already been written and that sexual activity increases cardiovascular risk especially for older people, six deaths are unfortunate but do not seem exceptional. Indeed, during clinical trials eight patients happened to die, but none of the deaths were caused by the drug. This is an issue worth watching, but hardly worth panicking over...that is, unless Viagra was the only reason you bought the stock.
Viagra is an important new drug, and assuming the safety issues are addressed, it will add substantially to Pfizer's business. But Viagra is just one of the many existing or potential blockbusters in the Pfizer stable. So even if the initial demand for Viagra fades, or worse yet if safety issues curtail or halt its use, Pfizer will survive.
Pfizer's Norvasc, a calcium channel blocker for the treatment of angina and hypertension, had sales of $2.2 billion in 1997 and could hit $3 billion next year. Zoloft, the company's drug for depression, obsessive-compulsive and panic disorders, had sales of $1.5 billion in 1997 and could hit $2 billion next year.
And prior to the spectacular Viagra debut, the co-marketed launch of Lipitor in 1997 by Pfizer and Warner-Lambert (NYSE:WLA - news) was considered the most successful new drug introduction ever. Lipitor is a cholesterol-reducing drug with multi-billion dollar potential for both partners.
Pfizer has won praise for its open-minded approach to the potential for drugs not developed in its own labs, leading to other co-marketing deals on possible blockbusters. Aricept is a recently-launched treatment for Alzheimer's developed by Eisai which Pfizer is co-promoting. And Searle, a unit of Monsanto (NSYE:MTC), recently chose Pfizer to co-market its new arthritis drug, Celebra. Searle plans to file for FDA approval in the third quarter of this year.
Pfizer also recently launched a new antibiotic, Trovan, which is enjoying a strong initial reception and has potential for $500 million in sales by next year. The company's new anti-psychotic agent, Zeldox, is still awaiting FDA review but could hit the market later this year.
These are just a few highlights from Pfizer's pharmaceutical lineup. Furthermore, the company has invested heavily in research and development, increasing the odds of a strong product pipeline for years to come. The company stepped up its R&D spending last year to nearly $2 billion or 16% of sales (well above the industry average of 12%). This is no guarantee that it will produce a steady stream of blockbuster drugs, but Pfizer is obviously committed to trying.
The company has also scaled up its marketing and sales force to match its product offerings. The investments are paying off now in the form of impressive margin expansion that analysts expect to continue going forward. Net profit margins rose to 17.5% last year from 15.7% in '95, and from 9.2% in '93. Analysts say that figure could approach 20% in the next few years.
Regardless of Viagra, most everyone agrees that Pfizer is a great company in terms of products, pipeline and management. There is still the question of stock valuation, though. What's a fair price to pay for such a great company? Even after its recent retreat to $103.63, Pfizer is trading at about 40 times 1999 earnings estimates. That's about twice the expected growth rate of 20%. Yet fans of Pfizer aren't bothered by this lofty P/E, indeed many analysts are throwing around target prices using multiples such as 52 times 1999 earnings estimates. It takes a strong stomach and fluffy pillow to sleep at night owning stocks with high multiples like that.
The near-term behavior of Pfizer's share price will probably continue to be dictated by news about Viagra. Investors with a long-term perspective and a deeper understanding of the company can take comfort, or better yet take advantage, if reactions to the Viagra saga continue to exaggerate its significance to the big picture at Pfizer.
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