Pfizer seen making hay from surprise high expenses
Wednesday October 14, 2:46 pm Eastern Time
By Ransdell Pierson
NEW YORK, Oct 14 (Reuters) - Pfizer Inc. (NYSE:PFE - news), whose shares dove Tuesday after unexpectedly high expenses contributed to a third-quarter earnings disappointment, will likely wrest major product successes from its heavy spending, analysts predicted.
Excluding non-recurring items, Pfizer late Tuesday reported third quarter earnings of $667 million, or $0.51 per diluted share -- widely missing the $0.57 consensus forecast of analysts polled by First Call Corp.
Its shares opened at 89 on the New York Stock Exchange on Wednesday, down 6-3/4 from their Tuesday closing price of 95-3/4. But they clawed their way back to 94-3/4 by 1408 EST/1908 GMT.
Hemant Shah, an independent New Jersey-based drug analyst, said Pfizer would have met the First Call consensus forecast if not for its surprisingly high spending in the third quarter for research and
development and for selling, general and administrative (SG&A) expenses.
''Year-over-year, they spent 26 percent more for SG&A expenses and 23 percent more for R&D,'' or $1.3 billion and $550 million, respectively, Shah said. He added that he had counted on just 20
percent spending growth in the quarter for both expense categories.
Disappointing sales of Pfizer's anti-impotence pill, Viagra, also played a part in the downside earnings surprise, Shah said, with the global take of $141 million for the third quarter being $10 million to $60 million below his Viagra forecast.
Pfizer noted that Viagra racked up sales over $400 million in the second quarter, but attributed much of that startling performance to high wholesaler stocking and strong demand in the weeks after its
launch in early April.
Pfizer said a big reason for its soaring SG&A outlay was its hiring of 1,100 new salespeople in the quarter to promote newer prescription drugs, particularly a promising pain and arthritis drug which it
plans to co-market for Monsanto Co. (NYSE:MTC - news).
The compound, Celebra (celecoxib), is now awaiting approval from the U.S. Food and Drug Administration and is deemed a potential blockbuster because of its apparent ability to ease pain
without the gastrointestinal side effects of current therapies.
''Pfizer probably spent $100 million to hire these extra 1,100 salespeople in advance of the Celebra launch, but by doing so they're preparing themselves for a very strong 1999. The company is basically on track,'' said Warburg Dillon Read analyst Timothy Chiang.
''Pfizer will be in the enviable position of having four blockbuster drugs on the market next year,'' Chiang predicted. They are Viagra, Celebra, its flagship hypertension and angina drug Norvasc (amlodipine), and the anti-cholesterol drug Lipitor (atorvastatin) which it co-markets for Warner-Lambert Co. (NYSE:WLA - news).
Moreover, he said, the company's margins will be bolstered by Pfizer's divestiture this year of its remaining medical device operations, whose profitablility paled in comparison to prescription drugs.
Michael Krensavage, a pharmaceuticals analyst for Brown Brothers Harriman & Co., said he was not greatly concerned by Pfizer's lofty third quarter expenses.
''Basically they're spending to hire salespeople for the important long-term future of the company. For the stock to get crushed yesterday was very short-sighted because the long-term fundamentals of Pfizer bring joyous tears to my eyes,'' Krensavage said.
Pfizer, unlike Merck & Co. (NYSE:MRK - news) and other peers, has no key medications facing U.S. patent expirations in the next few years, Krensavage said. ''And it has some nice new drugs -- Viagra already, and Celebra next year.''
In addition, Krensavage said Pfizer is awaiting FDA approval for Tikosyn (dofetilide), an anti-arrhythmia drug which he said could eventually have annual sales of $500 million.
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