Stock of the Day- Warner-Lambert: Drug Giant Bolsters Pipeline
Mar 11, 1999
In January Warner-Lambert (NYSE:WLA - news) announced
plans to acquire Agouron Pharmaceuticals (Nasdaq:AGPH -
news) , the biotech firm known for its top-selling AIDS drug,
Viracept. Last week, Agouron announced a significant
breakthrough in research for anti-cancer drugs. The folks at Warner-Lambert are surely pleased, though the news only gave their stock a modest lift. Shares of the drug giant have been stuck in an eight-month holding pattern. For several years Warner-Lambert was a high-flying favorite of momentum investors, but after this lengthy period of consolidation it may now be a better candidate for the "growth at reasonable price" crowd.
We'll tackle the issue of "reasonable price" later. Let's start with the growth prospects and fundamental backdrop at Warner-Lambert. The company has a strong lineup of new drugs and candidates in pipeline, bolstered by the Agouron acquisition. Analysts predict Warner-Lambert will deliver 30% growth in earnings this year and average 23% growth over the next five years, one of the strongest rates among big pharmaceutical companies.
How does a drug company with over $10 billion in sales sustain such impressive growth? Start with a steady stream of new products. The current engine of growth is Lipitor, a cholesterol-lowering drug introduced two years ago that brought in $2.2 billion last year and could hit $4 billion next year. As if Warner-Lambert needs any help with Lipitor sales, there's been a lot of recent media attention on studies suggesting cholesterol-lowering agents are not prescribed often enough. Lipitor's gains in market share could also get a boost from new studies on its effectiveness this year.
Another top product for WLA is Rezulin, a diabetes drug introduced two years ago. Some analysts have expressed disappointment at Rezulin's progress in penetrating the competitive market, and that is one reason for the stock's underperformance lately. Nonetheless, sales of Rezulin are expected at around $900 million this year versus $750 million in 1998.
Sales of Warner-Lambert's epilepsy drug, Neurontin, are expected to rise over 40% this year, but a patent expiration next year will likely hurt sales after 2000. Neurontin could also turn out to be useful in pain management, since the nerve centers that control seizures are closely linked to those that control pain.
Meanwhile, the pending acquisition of Agouron will add Viracept, the top-selling protease inhibitor, not to mention a promising bunch of new drugs in various stages of clinical trials. In addition to new HIV drugs, the pipeline includes late-stage compounds targeting cancer and eye diseases. The breakthrough reported last week involved Agouron researchers solving the structure of an enzyme that may enable them to design highly-targeted compounds to block or reverse tumor growth via a process called anti-angiogenesis. This approach to fighting cancer has received considerable publicity in the past year, both for advances and setbacks on this front, thanks to Entremed (Nasdaq:ENMD - news) and others.
Acquisitions always bring some risk, but the stock-swap deal for Agouron valued at over $2 billion is not expected to dilute earnings in 1999. And in the pharmaceutical industry, consolidation is a key strategic initiative these days because of the opportunities for cost savings and synergies (sales force overlap, cross-selling, etc.) not to mention to defray risk associated with bringing new drugs through
the costly development process.
Between Warner-Lambert's existing lineup of new drugs and its promising pipeline, the company brings to the table a unique combination of strong growth prospects and relative earnings visibility. These are traits normally prized by investors. So why the stalled stock price?
Disappointment over sales of diabetes drug Rezulin has been a factor, but valuation may have contributed as well. By July of 1998, the stock had soared 370% in two years. After eight months of consolidating now, Warner-Lambert still trades at a Price/Earnings (P/E) ratio of 48 using last year's earnings and 37 times '99 estimates. Major drug stocks normally command a premium valuation for their earnings visibility and noncyclical business, so the question is how much of a premium. Merck (NYSE:MRK - news) trades at 33 times '99 estimates, a little less than Warner-Lambert, but MRK is only expected to grow earnings at a 13% rate long-term compared to 23% for WLA. Pfizer
(NYSE:PFE - news) trades at a whopping 56 times '99 earnings estimates, and it's 5-year projected growth rate is 20%.
Relative to its big pharma peers, anyway, Warner-Lambert appears reasonably priced considering its growth prospects. It will need to execute on the Agouron acquisition to sustain its impressive growth rate, though. Key near term factors are an upcoming FDA advisory committee review of Rezulin for use as a combination treatment (March 26) and an analyst meeting on May 18.
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