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Can Pfizer Stay This Robust?


For years, Wall Street has had a love affair with Pfizer Inc. (PFE) That's only fitting: This is, after all, the maker of megadrugs including male-potency drug Viagra and cholesterol-fighter Lipitor. Altogether, Pfizer has eight drugs that each year bring in sales of more than $1 billion apiece, a record unmatched in the industry. Growth has been dizzying, with earnings gains of up to 35% a year in the late 1990s. Pfizer stock has traded at a rich premium to that of other drugmakers--tripling in price over the past five years. Pfizer management is considered to be smart and aggressive. It spends heavily on research but doesn't hesitate to pony up for a company it wants to buy, as it did for Warner-Lambert Co. two years ago.

But this could be the year the music stops for Pfizer. It's still a well-regarded company, making plenty of money. But investors and analysts are coming to realize that for the first time in years Pfizer may have trouble meeting the aggressive growth targets set by CEO Henry A. McKinnell.

Why? In the next year, several new drugs will begin to compete directly with some of Pfizer's most lucrative products, including Viagra. Just as troubling, Pfizer's lineup of new drugs looks thin relative to the company's size. Unlike the late '90s, when Pfizer launched a string of blockbusters, it now appears to have fewer superstars waiting in the wings. "Near term, their new-product pipeline is nothing to write home about," says Dr. John R. Borzilleri, portfolio manager at State Street Research & Management Co., which held 9.3 million shares at the end of 2001. And finally, few big cost-cutting opportunities remain from the Warner-Lambert purchase. Pfizer has already reduced its head count, consolidated facilities, and improved purchasing efficiencies.

All in all, it's enough to make some analysts doubt McKinnell's promise of double-digit increases in revenues for the next three years--along with growth in earnings per share of 19% to 22% in 2002, followed by increases of 15% or more in 2003 and 2004. SG Cowen Securities Corp. analyst Stephen M. Scala expects Pfizer's sales will climb just 8% this year, to $34.9 billion, although net income will grow 22%, to $10.1 billion. That skepticism is one reason Pfizer's premium in the market has come down. Scala figures that, based on 2002 estimated earnings, Pfizer stock now trades at a price-earnings ratio of about 26, about 12% more than the group of drug stocks he follows. That's down from the nearly 21% premium Pfizer has averaged for the past 13 years, Scala says.

McKinnell believes worries about Pfizer are misplaced. Even if competitors take off in markets such as cholesterol-lowering therapy, he says, the untreated populations for many of these drugs are so large that Pfizer's products should continue to post solid growth. McKinnell points out that the National Heart, Lung & Blood Institute's revised guidelines last year expanded the number of people suitable for cholesterol-lowering therapy from 9 million to 22 million. Indeed, many on Wall Street still expect Lipitor to become the first $10 billion-a-year drug by the end of 2005. Pfizer execs add that between 1997 and 2004, the company will have spent $500 million on 300 different Lipitor studies to find out, among other things, if the drug can reduce heart-disease risk in diabetics. The point, of course, is to persuade doctors to prescribe old drugs for new reasons. And the withdrawal last year of a Bayer cholesterol drug over safety concerns could discourage doctors from trying a new entrant.

McKinnell also disputes the notion that Pfizer's pipeline is weak. "I can think of five or six [drugs in the pipeline] that have multibillion-dollar potential," he says. Pfizer will continue to supplement its product line with co-marketing or license deals, he says--as it has with products such as Celebrex, the blockbuster arthritis drug that Pfizer sells with Pharmacia Corp. "We've projected [our growth] out three years," McKinnell says. "I know of no large company in any industry that has held itself accountable for that high growth for that long a period. We have the products to achieve that."

Certainly, Pfizer isn't afraid to spend big to ensure its growth. After all, it launched its hostile bid for Warner in large part to secure the rights to Lipitor. Not only did Pfizer end up with a $6.4 billion-a-year blockbuster but by the end of 2002, it will also have squeezed out $1.7 billion in costs from the two companies. Scala, at SG Cowen, figures this will send Pfizer's operating margin to 38.1% in 2002, up from 29.6% in 2000.

Still, with margin improvement likely to slow, the fate of Pfizer's marquee drugs becomes even more important. Later this year, for instance, AstraZeneca PLC (AZN) is expected to launch a new cholesterol-lowering drug, Crestor. Early data says it may be more potent than Lipitor. Crestor, says Sanford C. Bernstein & Co. analyst Richard T. Evans, could send Lipitor's annual growth rate into the single digits by 2003, down from 28% last year.

And Lipitor isn't the only Pfizer megadrug that's under attack. Viagra is about to face fierce competition. One new erectile-dysfunction drug, Vardenafil, is expected from Bayer (BAYZY) and its marketing partner, GlaxoSmithKline PLC (GSK), in the third quarter. Eli Lilly & Co. (LLY) and ICOS Pharmaceuticals (ICOS) are planning to roll out another compound, Cialis, in the second half. Viagra sales in 2001 rose 13%, to $1.5 billion. But Norman M. Fidel, health-care portfolio manager at Alliance Capital Management LP, says the new products could cut that rate to 8% to 9% this year. Pfizer execs say they will rev up their vaunted marketing machine, spending what's needed to defend key products.

Then there are Pfizer's new drugs. Its pipeline--including pregabalin, a drug for epilepsy, neuropathic pain, and anxiety--is respectable, but respectable may not be good enough to maintain Pfizer's torrid growth. There are, say analysts, just too few potential blockbusters in the near term, despite Pfizer's projected $5.3 billion in research this year, a 9% rise over 2001. Another potentially big new drug, Bextra, a treatment for arthritis, will be co-marketed with Pharmacia. So even if it hits big, Pfizer will have to share the revenues.

Moreover, like any other pharmaceutical house, Pfizer has to contend with new drugs that either don't pan out or else get delayed. Hopes were high for Exubera, for instance, an inhaled insulin Pfizer is developing with partners--until, that is, concerns arose that it could impair lung function. Its launch date remains unclear.

McKinnell boasts that few companies can manage such risks as well as Pfizer. "We have the most experienced management team in the industry," he says. But the question is whether they can keep Pfizer's growth engine humming. By Amy Barrett in New York, with Michael Arndt in Chicago


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