Why Pfizer Is Soaring While Rivals Slink


By David Shook Don't bother asking Pfizer CEO Hank McKinnell about how decelerating profits are keeping much of the pharmaceutical industry stuck in low gear. While Merck (MRK), Schering-Plough (SGP), and Bristol-Myers Squibb (BMY) have warned investors not to expect much earnings growth in 2002, Pfizer (PFE) is promising an increase of 20% or more -- plus average growth of 15% or better in 2003 and 2004.

"I know of no major company in any industry today that's willing to hold itself accountable to that high a growth rate, that far into the future," McKinnell told more than 400 analysts and investors at the company's business briefing in New York on Dec. 18.

McKinnell's is a bold promise, but even as patent expirations and competition from generic drugs relegate many of Pfizer's rivals to their worst slump in a decade (see BW Online 12/27/01, "Heartburn for Big Pharma's Investors"), he has persauded analysts that his company can still soar. "Pfizer has the size, scale, reach, and aggressiveness to stay on top," declares Viren Mehta, president of Mehta Global Partners, a drug-industry research firm in New York.

BUY ON DIPS? Although Pfizer's stock is expensive -- at $41 a share, it has a current price-earnings ratio of 35, much higher than that of other drugmakers -- the company nonetheless has an advantage: It won't face the generic-drug threat that's bearing down on other companies until several key Pfizer patents expire in 2006 and 2007 (see BW Online, 12/27/01, "Label Generic-Drug Makers Successful"). And Pfizer has molecules in development that should shore up its portfolio before patent expirations become a pressing concern. Brags McKinnell: "We've never been in a better position." The best strategy for investors, therefore, may be to buy on the dips -- and hope that Pfizer can keep hitting new highs.

Pfizer began to emerge as the dominant drug company in early 2000, when former CEO William Steere snatched Warner Lambert from the clutches of rival suitor American Home Products (AHP), a $90 billion acquisition. With Warner came cholesterol-fighter Lipitor, the drug market's No. 1 seller with $6 billion in annual revenues, as well as a host of experimental drugs from Warner's biotech labs.

At the same time, Pfizer signed a deal to co-promote Celebrex, the popular arthritis painkiller made by Pharmacia (PHA). This month, the two companies began marketing a second-generation version of Celebrex that may be even more effective than the original.

MIGHTY NUMBERS. These strategic moves have begun to pay dividends for Pfizer just as the rest of the industry has hit a downdraft. New York-based Pfizer now sells 7 of the top 25 drugs worldwide. (No. 2 GlaxoSmithKline sells only two.) Pfizer has 8 of the 43 blockbusters industrywide that gross more than $1 billion annually, and 4 of the 16 that generate $2 billion-plus.

Much of the rest of the industry is scrambling to replace lost revenues from drugs whose market share has been eroded by generic-drug producers. In 2001, AstraZeneca (AZ) lost its primary patent on the ulcer drug Prilosec, once the world's top-selling medicine, and Eli Lilly (LLY) said goodbye to its monopoly on its Prozac antidepressant. In 2002, patents will expire on Schering-Plough's Claritin antihistamine, and generic competition could emerge for Bristol-Myers' Glucophage diabetes drug.

Pfizer's portfolio is far better shielded. Lipitor and the company's valuable hypertension treatment Norvasc will enjoy protection from generics for four to five more years. Celebrex, the antidepressant Zoloft, and the antibiotic Zithromax all have several more years of exclusivity, too. Only Neurontin, Pfizer's epilepsy drug, faces a stiff challenge.

DEEP PIPELINE. The company recently obtained a controversial new patent on Neurontin through a legal loophole. In effect, Pfizer was granted an additional 17 years of exclusivity on the nearly $2 billion drug because it developed a more purified form of the molecule. The new patent is being challenged in federal court by off-brand competitors, but Pfizer is mounting a tough defense.

Most analysts believe Pfizer has one of the deepest drug pipelines in the business -- or at least one that's sufficient to deliver strong earnings growth for the next two to three years. Pfizer says it has in development, or will soon introduce, drugs for migraines, chronic pain in the arms and legs, epilepsy, HIV, osteoporosis, and breast cancer. Also on tap are an inhaled form of insulin, a drug to control incontinence, and another for bronchitis and emphysema.

Pfizer says it expects to make 15 new-drug filings with the Food & Drug Administration over the next five years. Not all will be blockbuster hits. But analysts say Exubera, the inhaled insulin; Bextra, the successor to Celebrex; and perhaps Pregabalin, a compound for epilepsy that may also be useful in treating pain and anxiety, could provide enough of a shield when Pfizer's existing lineup starts to go off patent.

WATCH CLOSELY. The dilemma for investors is how to buy into a company that looks so good but is so richly priced -- within spitting distance of its 52-week high of $46 a share. "I've never had the chance to recommend it," says Michael Krensavage, an analyst for Raymond James Financial.

Competition adds risk to the stock, too. While Lipitor is far and away the top-selling cholesterol drug, AstraZeneca is poised to introduce Crestor, a potent new medication for the same condition that could be more effective. And Forest Labs (FRX) may soon unveil a drug for hypertension that could encroach on Pfizer's $3 billion-plus Norvasc franchise.

The key for investors will be to watch closely how Pfizer deals with competition from these rivals and how smoothly it introduces new drugs such as Exubera and Bextra. At the stock's current level or lower, investors might find a chance to jump in before the next kernel of news on Pfizer rallies the stock again.

COURTROOM DRAMA. Pfizer does face one challenge that won't be easy to shake: litigation. Along with its acquisition of Warner-Lambert came Rezulin, a diabetes drug that has been pulled from the market for safety reasons. Pfizer faces more than 4,000 lawsuits filed by former Rezulin users -- plus thousands more that are tied to Pfizer's former minerals division, which sold a limited numbeer of asbestos products.

CEO McKinnell contends that nearly all of the claims on both fronts are spurious, and Pfizer General Counsel Paul Miller says they "shouldn't pose any material adverse effect on the financial position of the company." Still, a Texas jury in late December awarded $43 million in damages to one former Rezulin user who allegedly suffered liver damage from the drug. That suit has since been settled for what the company has described as a substantially lower sum, but more headline-grabbing verdicts could spook Pfizer investors.

While the suits could put pressure on Pfizer's stock, most analysts believe the company can maintain a far stronger position than nearly all of its rivals. "They're such a force," says John Apathy, a drug-industry expert for PA Consulting, a market research firm in Princeton, N.J. "They have so many products that still have legs." Pfizer also has the industry's largest sales force -- about 20,000 worldwide -- and may expand that army once Lipitor and Norvasc face more intense competition.

Call it a lesson in how sheer size can make a strategic difference in the pharmaceutical industry. While most of Big Pharma's players are stuck in neutral for now, Pfizer's heft and its diverse product line should keep it moving ahead. Shook covers the pharmaceutical industry and co-writes The Biotech Beat column for BusinessWeek Online in New York


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