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Biotech / Medical : PFE (Pfizer) How high will it go? -- Ignore unavailable to you. Want to Upgrade?

To: Andreas Samson who wrote (1685)	4/27/1998 12:21:00 AM
From: Jim Lamb	Respond to of 9523

Forbes article here Market Trends Pfizer versus Merck By Martin Sosnoff HOW DID WARREN BUFFETT MISS the drug stocks? Coca-Cola underperformed the market last year, while stocks like Pfizer continued a five-year roll. It's kind of surprising that Buffett missed it. He likes getting married to companies-and getting married to an ethical drug property is easy. Once you convince yourself that the company's research is productive and several blockbuster drugs are on their way, you just sit back and count new prescriptions every month. The last great buying opportunity was created by the Clintons soon after the 1992 election. A lot of people thought the game was over. Stocks like Merck and Pfizer sold down to 15 times earnings. Today Pfizer sells at 34 times projected 1999 results, twice the market's valuation. -------------------------------------------------------------------------------- The hardest problem with drug stocks for a portfolio manager is to avoid selling. -------------------------------------------------------------------------------- The hardest problem with drug stocks for a portfolio manager is to avoid selling. The way I solve this is to throw anyone out of my office who recommends their sale-or to yell back at them: "Find me something better!" The health care sector of the S&P 500 is comparable in size with the technology sector, about 13% of the market. Staying overweighted in technology requires a task force of analysts and money managers to help sort out the news. Whole subsectors of technology imploded, like semiconductor equipment, when South Korea's currency got trashed. Staying overweighted in drug stocks is much easier. It just requires old-fashioned security analysis of a type not much practiced these days. Years ago you compared General Motors with Ford and Standard Oil of New Jersey with Texaco. I don't see analysts tearing apart the income statements of rival drug houses. Yet it's not all that hard. The two biggest expense categories are R&D and selling, general and administrative expenses. Let's parse Pfizer and Merck. Pfizer's cost of sales is just under 20% of revenues. Marketing is about twice the cost of sales and R&D nearly equivalent to costs. Gross margins run around 80%-almost as good as Microsoft and better than Coca-Cola. The difference between Merck and Pfizer is awesome, starting in 1992 when the Clintons tried to stick a stake in their hearts. Merck, alas, ran scared, while Pfizer literally pressed its bet and left Merck in the dust. Not that Merck didn't have the goods: Vasotec, Mevacor and now Fosamax are great successes. But Pfizer has a full house with Norvasc, which treats hypertension and angina, now a $2 billion product. Zoloft, an antidepressant, is another blockbuster. Waiting in the wings is Viagra, a pill for male sexual dysfunction, and Zeldox, for schizophrenia. While Merck made a big bet, acquiring a pharmacy benefit management company, Pfizer compounded its R&D spending at an 18% rate. The industry norm is 9%, approximately Merck's level. In 1992 Pfizer spent $851 million, while Merck stood at $1.1 billion. For 1997 Pfizer spent $1.9 billion on R&D, substantively more than Merck. In the past two years Merck has stepped up R&D again, but Pfizer has taken the lead. Based on revenues, Merck should be spending 20% more than Pfizer, not 13% less. In marketing, Merck flattened spending in 1993 and didn't pump it up again until 1996. Meanwhile, Pfizer became a marketing buzz saw, benefiting now from many joint venture deals. Spending slightly less on marketing than Merck in 1992, Pfizer is spending $5 billion today, $700 million ahead of Merck. The next three years look great for Pfizer, but just pretty good for Merck, which matched the market last year, up 31%. Pfizer rose 79%. There's more to come. Pfizer looks expensive at 34 times projected 1999 results, but taking into consideration its relatively lavish investment in the future, the valuation adjusts down to 28. Merck is selling at 25 times 1999 earnings with less momentum. My bet's on Pfizer. And the market? We aren't close to the Nifty Fifty valuations of 1972. Then, most growth properties sold at 40 times earnings. Today the typical drug stock goes for 30 times earnings. The ratio of market value to revenues was much higher for growth stocks in 1972-four times, compared with three currently. Last year, before getting nervous, I predicted a Dow of 10,000 by 2000. If the market's momentum continues, I'm going to look too conservative. -------------------------------------------------------------------------------- Martin Sosnoff is chief investment officer of Atalanta/Sosnoff Capital in New York and author of Silent Investor, Silent Loser. \| back to top \|