12/9/98 Warner Lambert: Concern Regarding Diabetes Drug Rezulin
The Los Angeles Times reported that 33 deaths are being blamed on liver damage in patients taking Warner Lambert's (NYSE:WLA) blockbuster diabetes drug Rezulin. This same paper reported earlier that an FDA officer assigned to evaluate Rezulin, Dr. John L. Gueriguian, recommended rejecting the drug after documenting its possible danger to the liver. After voicing his concerns, it is reported that Dr. Gueriguian was summarily removed from the review in late 1996 by senior FDA officials. Further reports detail that at least one government researcher who was to evaluate an impartial study on Rezulin may have also been employed by the company, thereby generating a conflict of interest. The company has yet to make a formal statement regarding these events.
Rezulin was given "fast track" review, and was approved in December 1996. The product has remained on the US market, despite past concerns about toxicity because it is the only product that re-sensitizes the body to insulin and helps reduce diabetes patients blood sugar enough so that fewer daily injections of insulin are needed. Rezulin sales were up 32% this past quarter to $181 million helping the company boost its profitability 49% to $296 million. It has been estimated that Rezulin will generate $740 million in revenue for Warner Lambert in FY 1998 and $1 billion, or roughly 8.5% for total estimated sales of $11.7 billion in FY 1999. Rezulin in conjunction with Lipitor (for cholesterol reduction) is among the company's most crucial products in the pharmaceutical giant's pipeline. Lipitor and Rezulin revenues by FY 2002 have been estimated to be in the range of $7 billion.
It is possible that the FDA may review reports of Rezulin's liver toxicity in greater detail. There is also a possibility that the drug could be recalled in the interim. Based upon conversations with individuals at the company (who declined direct quotation), however, we are not expecting any serious fallout from this wave of reports.
We like Warner Lambert because of its diversification in both pharmaceuticals and confectionery products (roughly a 44% and 56% split respectively). We believe that the company's overall estimated earnings growth of just over 30% ($1.48E in FY 1998, and $1.95E in FY 1999), its history of developing highly regarded pharmaceuticals and consumer products from an extensive R&D pipeline, and future opportunities for growth should far outweigh the short-term negative impact that this news is expected to generate. We would advocating purchasing shares on weakness, and upon the release of a formal statement by the company detailing their accounts of this week's news.
We acknowledge that the company trades at multiples considered "rich" by Wall Street standards (roughly 39x FY 1999 estimates, 19.6x book value, over 40x cash flow, and over 6x revenues). However, among the leading pharmaceutical companies we believe that Warner Lambert's pipeline offers the fastest growth, and potentially the richest reward to shareholders.
Analyst: Glenn Curtis
(Updated 12/7/98 with WLA trading at $75.25)
Recommended 11/16/98 at $73.63 |
