PFE in Barrons 4/24/99 "Best company in the industry"
-- In recent weeks, pharmaceutical stocks have looked sicker than dogs. And many shares have slipped dramatically from their 52-week highs. Pfizer, which hit 150 1/8 earlier this month, now trades at 126 15/16. Warner-Lambert's stock has fallen from a high of 85 15/16 to 67 7/8. And Merck trades at 75 3/4, 10 points below its high.
The easy reason for this abrupt reversal is that these stocks served as safe havens when the Asian contagion broke out. Steady earners, they came through with 15%-16% earnings last year when the earnings of the S&P 500 were decelerating.
But as investors have decided the world is not coming to an end, they've started to take some profits in their safe-haven favorites and looked to stocks with lower valuations.
But there may be a deeper cause for concern: "At this moment in time, it isn't clear what the sexy new {drug} launch for 2000 will be," explains Carl Seiden, a pharmaceutical analyst at J.P. Morgan.
Think back: In 1997, the market knew Pfizer and Warner-Lambert would introduce Lipitor, a drug that reduces cholesterol levels. In 1998, Pfizer's Viagra made a splash, and medicines to treat the signs and symptoms of osteoarthritis have caught headlines this year. Monsanto has such a drug, Celebrex, on the market, and Merck has one on the way with Vioxx.
Seiden still expects the group to show 16% earnings growth and notes that many drugs are nearing their final stages of development. There are drugs in the works for diabetes, an inhaled version of insulin and a new drug for lowering blood pressure. But at this point, a blockbuster has become more a matter of faith in drug companies' continued innovation, providing less certainty than in years past. Meanwhile, the S&P 500's earnings prospects are looking brighter.
So, investors have to wonder whether the rotation out of the drug stocks into lower-multiple stocks will continue. J.P. Morgan's equity strategist, Doug Cliggott, believes the shift will continue and therefore recommends an underweighting of pharmaceutical stocks.
For those worried about the rotation continuing, Seiden recommends stocks with lower relative price-to-earnings multiples, like Bristol-Myers Squibb or Pharmacia & Upjohn. But if you think the rotation is over, his top choice remains Pfizer, which he dubs "the best company in the industry."
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