Expect wla to be up monday based on Barrons article. Barrons moves stocks on Monday...
A potential change to the secret agreement between Warner-Lambert and
Pfizer involving the blockbuster cholesterol-reducing drug Lipitor could revive
Warner-Lambert's depressed stock.
Warner-Lambert, an industry darling as recently as last summer, has been the
worst-performing major drug stock in 1999 because of concerns about a
possible drop in sales of its diabetes drug, Rezulin. Its stock price fell 3 1/2
last week to 66 and now is down 12% in 1999, trailing its peers, which are
up an average of 5%. The shares are down 23% from their peak of 86 last
July.
"Rezulin
has
become
such
a
cause
celebre
that
it
has
obscured
the
value
in
Warner-Lambert,"
says Neil Sweig, drug analyst at Southeast Research Partners. "Warner is the
most undervalued stock in the drug group." He sees it hitting 90 in 2000.
Sweig believes that Warner-Lambert may push for a change in the terms of its
secret Lipitor pact with Pfizer to increase its share of Lipitor's sales starting in
the year 2000. If such a deal is reached, it could meaningfully boost
Warner-Lambert's profits and put the company back in investor favor.
Here's the background on Lipitor. Before Warner-Lambert introduced the
drug in 1997, it turned to industry heavyweight Pfizer to co-market Lipitor
because Warner-Lambert then had a relatively small prescription-drug
business and a modest sales force. At the time, Lipitor appeared to face an
uphill battle against entrenched cholesterol drugs like Merck's Zocor.
Warner-Lambert then was best known for its consumer products, including
Listerine mouthwash, Schick razors and Trident chewing gum.
Pfizer agreed to co-market Lipitor using its powerful sales force in return for
an undisclosed share of Lipitor's revenues. Pfizer has a similar deal with
Monsanto to market the latter's hot arthritis drug, Celebrex. Neither
Warner-Lambert nor Pfizer has revealed the details of the Lipitor revenue
split, but Sweig estimates that Warner-Lambert gets 60% and Pfizer 40%.
Lipitor's sales are expected to hit $3.2 billion in 1999, up from $2.2 billion in
1998, and could top $6 billion in 2002, making it the world's top-selling drug.
As part of the original agreement with Pfizer, Warner-Lambert is entitled to
co-market one of Pfizer's new drugs. Yet Sweig says there's nothing in
Pfizer's drug pipeline that compares with Lipitor's sales potential. That's why
he believes Warner-Lambert will try to negotiate a deal with Pfizer to cut
Pfizer's share of Lipitor's revenues to around 20% from his current estimate of
40%. Assuming no change in the Lipitor agreement, Sweig expects
Warner-Lambert to earn $1.95 a share in 1999, up 31% from 1998, and hit
$2.40 a share in 2000.
If Pfizer's share of Lipitor's revenues falls to 20%, it would add 26 cents a
share to Warner-Lambert's per-share profits based on this year's projected
sales.
One key issue is whether Pfizer is amenable to taking a smaller cut of Lipitor's
sales. It may argue that a deal is a deal, and that Warner-Lambert must make
do with a drug from its pipeline. Carl Seiden, the drug analyst at J.P. Morgan,
believes the two companies have a happy marriage given the enormous
success of Lipitor, and that Pfizer wants to resolve the matter amicably.
Seiden and Sweig argue that Warner-Lambert looks attractive even if it
doesn't get a larger share of Lipitor's revenues. It now trades at 34 times
projected 1999 profits, in line with the P/E multiples of American Home
Products, Merck and Pharmacia & Upjohn, three companies with lower
projected profit growth rates.
Rezulin's fate has dogged Warner-Lambert this year. The highly publicized
recent meeting of a Food and Drug Administration advisory panel on the drug
did little to assuage investors even though the panel concluded that the
benefits of Rezulin outweigh its risks. Rezulin has caused liver failure and
death in very small numbers of patients.
Seiden is assuming no increase in Rezulin's sales, now running at $800 million,
because of increased competition in the category. Seiden sees
Warner-Lambert's profits growing at an average annual rate of 18% from
1998 through 2003. The company's growth still could top 10% annually in the
unlikely event that Rezulin's sales disappear.
Warner-Lambert may disclose a resolution of its Lipitor talks with Pfizer as
early as a scheduled meeting with Wall Street analysts on May 18. Given their
importance, the Lipitor negotiations are apt to be the focus of growing interest
on the Street in the weeks ahead.
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