Biotech/Pharmaceuticals
Price, Perception Put Pfizer in a Costly Fix
By Jesse Eisinger
Senior Writer
6/16/99 12:23 PM ET
URL: thestreet.com
Pfizer (PFE:NYSE), the stock safe enough for the tired, hungry, huddled masses, is making them a lot poorer these days.
Here was the stock everyone could own, with a drug, Viagra, that even pretty faces in Hollywood could understand. Even Barbra Streisand thinks she's a stock-picking genius because she scooped up some Pfizer stock upon hearing about the luv drug, according to Fortune.
It's lost more than 50 points since early April.
Too bad it's got more room to fall.
"I'm still skittish about where we are in the cyclical rotation," says drug analyst Alex Zisson at Hambrecht & Quist. He is referring to the two-month-old move by investors out of the so-called defensive stocks -- which have earnings that don't fluctuate so much with the economy -- and into stocks that could benefit from strong economic growth. "I'm worried about the high P/E stocks [in the sector]. And I have mixed feelings about the pipeline," he says.
Changes to Pfizer's co-marketing deal with Warner-Lambert (WLA:NYSE) on anticholesterol pill Lipitor, announced Wednesday morning, aren't likely to provide the spark that Pfizer owners need. The companies agreed to co-promote a migraine drug Relpax. But Wall Street considers the migraine market a busted category. The two companies also said they would make a combo product of hypertensive Norvasc and Lipitor. But the statement said nothing about timing, and the first thought of many investors in these Thomas Harris-saturated times is cannibalization.
So Pfizer's turbocharged growth is likely to slow, earnings estimates are likely to continue falling, and analysts are suddenly less enamored of the pipeline. Sure, Pfizer's still got strong growth and a strong patent position, but it's all a matter of price and perception.
Simply put, Pfizer was stunningly expensive. "It ran up the most; it had the most to fall," Zisson points out. He isn't recommending the stock, and H&Q hasn't banked for the drugmaker.
The markets for would-be key growth products, like Viagra and antibiotic Trovan, which has had its use restricted by the Food and Drug Administration, have diminished substantially. In addition to Trovan, the company's antipsychotic Zeldox, which was turned down by the FDA last year, and the heart-twitch drug Tikosyn have run into problems. The problems with the agency and the handful of speedbumps to late-stage products have analysts worried about the company's relationship with government regulators and have tarnished Pfizer's R&D reputation.
On an earnings basis, the most fundamental measure of a stock's valuation, Pfizer still doesn't come as a bargain. At Tuesday's close of 97 1/2, it was trading at 39.8 times the 1999 earnings estimate of $2.45 a share, according to First Call. The company is supposed to earn $2.93 a share next year, giving it a projected growth rate of 19.6%. The company's expected to earn $3.49 a share in 2001, for 19% growth. (Pfizer spokesman Brian McGlynn reiterated the company's comfort with a range of $2.40 a share to $2.50 a share for 1999 and wouldn't comment on 2000 EPS estimates. He declined to comment on broader concerns about the company.)
No doubt, these are spectacular growth rates for a company that is working off a base of last year's $3.4 billion in net income on revenue of $13.5 billion. It so happens the market is aware that Pfizer is rolling in green. Analysts have been suggesting for some time that drug stocks, based on reliable profitability and strong growth prospects, should trade at twice their growth rates. This generous assumption is no immutable law, of course; nevertheless, even that rule of thumb suggests Pfizer is -- to use the perennial euphemism of the market -- "fully valued."
There goes your upside.
Then there's the trend in estimates, a disconcerting one. Estimates are falling, and when that happens, a stock's price-to-earnings ratio doesn't expand; nor does the stock tend to trade at a premium to the group. The estimates for 1999 and 2000 topped out in early October of last year. In that month, Pfizer was expected to earn $2.60 a share in 1999, 15 cents, or 5.8%, above the present estimate. For 2000, the company was supposed to pull down $3.21, 8.7% higher than the current thinking. Pfizer essentially guided estimates down for the year at the end of the first quarter, due to increased spending on marketing and research, but clearly things have been going in the wrong direction for about nine months.
The company faces increased competition with painkiller Celebrex from Merck's (MRK:NYSE) Vioxx. The presence of both drugs may expand the market or result in ruthless, ruinous competition. (Pfizer markets Celebrex with Monsanto (MTC:NYSE).) Also, the hyperthyroid growth in the anticholesterol class cannot last forever. When it does slow, Lipitor will too. Antidepressant Zoloft's market share may be curtailed by Warner's and Forest Labs' (FRX:AMEX) Celexa.
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