Pfizer's Quest to Stay Ahead of the Pack


By Amy Tsao In a sector whose earnings performance has disappointed over the last several years, drugmaker Pfizer (PFE) has been the exception. While many of its peers fumbled, the world's largest pharmaceutical company continued to meet Wall Street's expectations. Many would say that the New York City-based outfit, which bought Warner-Lambert in 2000 and Pharmacia last year, is proving that bigger is better. In 2004, its first full year with Pharmacia integrated, Pfizer expects to show a 20% rise in revenues, to $54 billion, and an increase of 31% in net income, to $16.5 billion.

The stock seems to be on a steady course. At around $35, shares have risen about 16% this year, while the broad Standard & Poor's 500-stock index is up just under 8% and pharmaceutical stocks are about 10% higher, on average. Analysts, by and large, expect Pfizer to remain a top performer. Of 27 analysts who follow it, 22 rate Pfizer a buy or strong buy.

"PURE PROFIT." Might there be more to the Wall Street darling than meets the eye? Says one analyst: "It is the best in a struggling group...but things are not as good as they appear." Analysts often dismiss Pfizer's weak spots because they want to maintain positive ties with it, according to John Alsenas, portfolio manager at ING Investment Management. "There's no real banking business coming out of Pfizer, but everyone wants to be on the list," he says. (Alsenas doesn't own Pfizer stock.)

With $8 billion in sales, Lipitor, Pfizer's biggest and most important drug, accounted for 24% of 2002 revenues of $32.4 billion. Although the world's No. 1 prescription medication is expected to be challenged in coming years, unit sales through April, 2003, are up 4%, according to prescription data tracker IMS Health (see BW Online, 7/30/03, "Fat City for Pfizer?"). That's better than the 2% unit-sales gains the overall market for such drugs is seeing, and analysts like Alsenas appreciate what a rise of any sort can do for the bottom line. "Once you've got a mature product," he notes, "every incremental sale is pure profit."

Yet, while the Pharmacia acquisition will help Pfizer meet near-term earnings targets, "it needs a new pipeline of products to maintain growth," says Weidong Huang, vice-president of New York-based TimesSquare Capital Management. (Huang owns Pfizer stock, but his firm doesn't.)

STATIC STATINS. Pfizer says it recently received Food & Drug Administration approval for three drugs -- migraine treatment Relpax, hypertension drug Inspra, and Somavert for growth-hormone disorders. But the benefit of those approvals may not offset the potential risks to Lipitor, nor the coming competition Viagra will face from Eli Lilly's (LLY) Cialis and GlaxoSmithKline (GSK) and Bayer's (BAY) Levitra. Then there are the losses by hypertension drug Norvasc and pain drug Neurontin to generic copycats. Says Alensas: "If you're Pfizer, you have to crank out a half-dozen blockbusters each year to maintain double-digit growth rates."

As for valuation, the stock doesn't seem to expensive at a 2004 price-earnings ratio of 17. But, says Shaojing Tong, analyst at Mehta Partners, earnings growth will drop to single digits in three years. "We still have a positive recommendation on Pfizer," he says, adding: "But at this price level, we're not as aggressive as we were." (Tong doesn't own Pfizer shares personally, but his firm does.)

Lipitor's slowing growth is Pfizer's biggest challenge. The sluggishness of the whole statin group -- drugs that stop the liver from turning fat into cholesterol -- has surprised analysts. Many divide the blame between a downbeat economy and insurers' increasing pressure on consumers to buy the cheapest drugs. The introduction of lovastatin, a generic, in early 2002, also has dampened demand, as has the 2001 recall of German drugmaker Bayer's (BAY) Baycol.

COMBO PILLS. Those factors may be just the start of Pfizer's Lipitor problems, because newer treatments will soon test the medication's dominance. Crestor, a statin from Astra-Zeneca (AZN) launched earlier this year in Europe and Canada, is expected to get U.S. approval in coming months. Pfizer has dismissed Crestor's performance as "underwhelming," but analysts fear it could threaten Lipitor's market share. "If you have a lot of price-cutting from Crestor in the U.S., it does present some risk," says Michael Dauchot, senior health-care analyst and lead portfolio manager at Dresdner RCM Global Investments. If Crestor can take 10% of the market, it would be a substantial loss for Lipitor. (Dresdner owns shares in Pfizer; as an individual, Dauchot does not.)

In 2005, Merck (MRK) hopes to introduce a single pill that will be a cocktail of Zocor and Schering-Plough's (SGP) new cholesterol-cutter, Zetia. "Once Crestor and Zocor-Zetia are introduced, we expect Lipitor to lose its exclusive grip on newly diagnosed patients and...switches to become more frequent," Bernstein Research analyst Richard Evans wrote in a recent report.

When Zocor goes generic, most likely in 2006, erosion of Lipitor's market share could intensify. Alsenas figures insurance companies trying to trim the cost of prescription drugs will find the low-priced generic too attractive to ignore. Says Alsenas: "If I'm a big insurer, saving a few pennies here and there, I would make generic Zocor my preferred...co-pay drug."

DIABETES, TOO. Pfizer argues that tens of millions of people with high cholesterol are undiagnosed or untreated and that this represents a vast and untapped pool of potential sales. On the other hand, some analysts worry that the market for cholesterol-lowering medicines may be reaching its natural limit. And, as Alsenas points out, even patients who are diagnosed don't always take their prescribed medicine.

That debate aside, Pfizer says it will build Lipitor's sales with stepped-up marketing and by highlighting the drug's track record of safety and efficacy. In a recent trial involving diabetics, Lipitor proved so beneficial that the control group was switched from a placebo to Lipitor. Pfizer also has filed an application to the FDA to sell a combo pill consisting of Lipitor and hypertension drug Norvasc.

The wheels aren't coming off, but challenges are mounting for Pfizer. For the longer term, it needs to expand the market for Lipitor while adding fresh blockbusters if it's going to maintain the growth rate investors want to see. Tsao covers the pharmaceutical industry for BusinessWeek Online in New York


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