A Close Look at Warner-Lambert
The Motley Fool, The Rule Maker Portfolio
by Matt Richey (TMF Verve)
ALEXANDRIA, VA (May 26, 1999) -- Day three of
pharmaceutical week in Rule- Maker land brings us to
one of the fastest growing companies in the industry --
Warner-Lambert (NYSE: WLA). Even if you've never
heard of the company, you're probably quite familiar with
its well-stocked portfolio of consumer brands. Listerine,
Benadryl, Sudafed, Rolaids, Neosporin, Schick razors,
Halls cough drops, Certs, and Bubblicious are just a
sampling of the company's consumer health care and
confectionery products. But while these products operate
in a profitable and well-protected niche, they don't offer
the profit and growth potential of the company's
Parke-Davis pharmaceutical division.
After several years of meager growth, this diversified
consumer products and health care concern began
growing rapidly in 1997 with the introduction of Lipitor, a
cholesterol-lowering blockbuster. In addition to Lipitor
and other in-house developments, Warner-Lambert
bolstered its pipeline with the recent acquisition of cancer
and viral disease specialist Agouron Pharmaceuticals.
Sort of like Johnson & Johnson (NYSE: JNJ),
Warner-Lambert's business is driven by high-growth
pharmaceuticals, while the modest-growth consumer
staples act as a stabilizing cash-cow. Let's take a look at
the company's first quarter financial results to see how
this interesting mix of businesses has performed of late.
Here are links to the company's Q1 press release and
10-Q.
A quick glance at the income statement confirms that
business has been booming. Sales grew by 29%, and net
income grew even faster at 37%. Digging a little deeper,
I see that both gross and net margins have been
expanding, too. The high-margin pharmaceutical division
led the way with 48% growth in sales, which was over
half of the company's overall revenue and over 70% of
operating income.
Meanwhile, the consumer health care division didn't fare
too badly either, turning in a respectable 13% sales
growth. The confectionery division was the laggard,
gaining only 4% in sales. Overall , gross margins of 76%
and net margins of 13% are very good, but more-focused
pharmas such as Pfizer and Schering-Plough do better.
Nevertheless, Warner-Lambert is showing excellent
direction on these metrics.
Taking a closer look at the pharmaceutical division,
Lipitor led the way with sales of $751 million -- over
one-quarter of total sales. Co-marketed by Pfizer, Lipitor
is the most prescribed cholesterol-fighter in the U.S.,
where it holds a 40% share of new prescriptions. The
company anticipates eventual annual sales of $10 billion
or more for this drug alone. To increase Lipitor's market
share, the company is engaging in life-cycle management
programs that aim to identify new potential uses and
patient populations.
Moving on to the balance sheet, the good news continues. The company turned
its profit growth into cold, hard cash, while at the same time trimming both short-
and long-term debt. The ratio of cash-to-debt more than doubled, but at 0.79, is
still short of our standard of 1.50. Working capital management was excellent as
evidenced by the declining Flow ratio, which now sits at a very good 1.0.
All in all, Warner-Lambert's business is humming along quite nicely with all
important financial metrics headed in the right direction. Out of 21 hard-to-get
financial direction points on our Rule Maker Ranker (a free spreadsheet analysis
tool, linked at bottom), Warner-Lambert achieved an impressive 19 points. And
when compared to peers Pfizer, Schering-Plough, and Johnson & Johnson, the
company edged its way into the second-tier of Rule Makers with a score of 40
points (see analysis).
Looking to the future, Warner-Lambert's in-house pipeline offers tremendous
potential. The following pharmaceuticals are in advanced development:
Thereapeutic Area Compound Potential Use
Arthritis/ CI-1004/Dual Inflammatory
Inflammation Inhibitor diseases
Cardiovascular Avasimibe Coronary Disease
Central Epilepsy and
Nervous System Pregablin Anxiety Disorder
Central
Nervous System Igmesine Depression
Chemotherapy Clinafloxacin Bacterial Infection
Diabetes Zenarestat Diabetic pain
Perhaps even more exciting than the company's in-house pipeline is the portfolio
of potential compounds gained in the $2.1 billion acquisition of Agouron
Pharmaceuticals, which closed on May 17. Agouron specializes in the treatment
of cancer, viral diseases, and diseases of the eye. In addition, Agouron makes
Viracept, the country's leading treatment for HIV infection and AIDS.
Combined with Warner-Lambert, Agouron gains global reach as it begins to
commercialize its products. Warner-Lambert will benefit from Agouron's library
of more than 400,000 compounds. Most importantly, Agouron provides its unique
structure-based drug design based upon the structure of proteins that play key
roles in human diseases such as cancer and AIDS.
With the inclusion of Agouron, Warner-Lambert has 46 new chemical
compounds and 55 distinct clinical projects underway to fuel future growth. As
the company continues to focus more heavily on pharmaceuticals, gross and net
margins should edge higher, positioning the company as a potential first-tier Rule
Maker. This is definitely one to watch.
Matt
fool.com |
