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Concern Mounts Over Rezulin Review (3/24)
Individual Investor Online Analysis
Much concern has been voiced over the planned March 26th review of Rezulin, the company's Type-2 Diabetes product by an FDA Advisory Panel. Some believe that the review will result in the vindication of Rezulin. But most investors have predicted a negative outcome, sending the shares down 22.5% from its 52-week high of $85.94. While the product was approved with the full knowledge that toxicity and adverse liver function is a risk, the FDA is the wildcard that is holding down the stock.
If Warner Lambert, and Rezulin are given a clean bill of health this Friday, assume that the stock will open higher on Monday morning. If the news coming from the panel is not positive we can expect the shares to pull back. Regardless, it is likely that the stock will be volatile and may rise or fall sharply by day's end.
David Saks, the highly-respected drug analyst from Gruntal, downgraded the stock from "strong buy" to "hold". he also lowered his earnings estimate to $1.87 per share from $1.92 per share in FY 1999, and his FY 2000 estimate to $2.35 per share from $2.45 per share. Beyond concerns of a regulatory problem for Rezulin, he feels the shares are just too darn expensive. He notes that the average P/E for 2000 is 31 times projected earnings, below that of Warner-Lambert's P/E of 36 times.
Saks made his move after the British Medicines Control Agency (akin to our FDA) rejected Rezulin's re-application for approval submitted by Glaxo Wellcome (NYSE: GLX). The same concerns regarding toxicity in the liver were the cause of the rejection. The FDA, priding itself on strict quality control will likely not dismiss this finding as irrelevant. Additionally, SmithKline Beecham PLC (NYSE: SBH) and Eli Lilly (NYSE: LLY) are close to approval for drugs that are similar to Rezulin. All of this news has the potential to work more against than for the Warner Lambert shareholder.
The shares trades at roughly 28.3 times FY 2000 estimates. This is at a slight premium to the anticipated 25.6% earnings growth rate (newly revised) that is expected over the next 12 months. We believe that much of the controversy surrounding Rezulin has already been factored into the stock. We reiterate our long-term positive outlook on Warner Lambert.
Analyst: Glenn S. Curtis
Updated on 3/24/99 with WLA trading at $68.19 Recommended 11/16/98 at $73.63
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