Wyeth's Quickening Pulse


By Amy Tsao With its first-quarter earnings call on Apr. 21, pharma giant Wyeth (WYE) seems to have assuaged many of Wall Street's concerns. Sales of its major drugs grew handsomely. Long-hampered manufacturing capacity for Prevnar, its bacterial meningitis vaccine for children, will be up and running in the second half, execs say. And the Madison (N.J.) outfit even offered a nugget of R&D gold by announcing a deal with Belgium drugmaker Solvay (SOBS) to co-market four potential mental-health drugs.

Robert Essner, Wyeth chairman, president, and chief executive, was all smiles: "I look at our performance overall, and the vast majority of our products have been above expectations," he told BusinessWeek Online.

TIME TO "WARM UP"? David Moskowitz, analyst at Friedman, Billings, Ramsey & Co., is certainly bullish, rating the stock outperform. Moskowitz notes sales of depression drug Effexor -- Wyeth's biggest and highest-margin product -- were strong, up 31%, to $776 million in the first quarter. (Moskowitz doesn't own the stock, and his firm has no banking ties to Wyeth.) Protonix, used to treat severe heartburn, which has been facing over-the-counter competition from Prilosec, held up well, posting a rise of 14%, to $411 million. And while sales of hormone-replacement products such as Prempro and Premarin fell 34%, to $266 million, year-over-year, they appear to have stabilized since the fourth quarter of 2003.

Investors were happy, or at least comforted, with the earnings report, lifting the stock by 3.2% on Apr. 21, when it closed at $40.24. Despite that gain, Wyeth stock has lost 38% over two years, while the drug sector as a whole has fallen just 9%.

Thanks to the stock's current price and indications of a turnaround, investors are again becoming interested. At 14 times the 2005 earnings-per-share estimate of $2.87, Wyeth is one of the sector's cheapest names. The relatively good patent position on existing drugs and a solid pipeline will lead "investors to warm up to it," Moskowitz predicts, adding that the stock could gain 32% over the next 12 to 18 months, to $53. To Kris Jenner, health-care analyst at T. Rowe Price, Wyeth is starting to show progress: stocking a pipeline with promising drugs through 2010, raising its growth rate, and curtailing past manufacturing snafus.

"TOUGH VACCINE." Resolving outstanding litigation involving the notorious diet drug fen-phen, which was linked to possible heart-valve problems by the Food & Drug Administration in the late '90s, is both Wyeth's toughest goal and the least predictable outcome, says Jenner. But he figures that the lingering uncertainties have already been figured into the share price. The other aims "seem quite achievable, though [they haven't] occurred at this point," he adds. (Jenner's firm owns Wyeth stock.)

Some of those uncertainties now seem less so, however. With production on its Prevnar vaccine coming back on-line this year, Wyeth has told analysts it will likely sell between 20 million and 23 million doses, about even with 2003 levels. A new contract manufacturer brought on to make the product just received the green light from the FDA and should help meet that goal.

"It's a tough vaccine to make, and everyone needs to understand that. But I think we're making progress," Essner says. "Our hope is that, toward the second half of the year, we'll be over the hump on this issue."

GROWTH SPURT. Wyeth's pipeline, analysts say, could prove to be one of the industry's strongest. The latest deal with Solvay adds a schizophrenia drug in late-stage testing and three other, earlier-stage neurology drugs. Essner promises that at the June 2 annual R&D meeting for investors, the vast majority of updates will deal with "innovative, first-in-class" drugs in Phase 3 testing. Those drugs will be aimed at a broad spectrum of disease areas, including women's health, oncology, mental health, influenza, and Alzheimer's disease.

As for growth, Wall Street sees increases of around 8% or 9% this year and next. That's respectable vs. the low single digits anticipated for Merck (MRK), Bristol-Myers Squibb (BMY), and Schering-Plough (SGP). And that pace should soon improve, says Scudder Private Investment Counsel Managing Director Greg Fuss, as "the pieces of bad news end up being pushed to old news." (Fuss doesn't personally own Wyeth, but the stock is in client portfolios, and Scudder's parent company, Deutsche Bank, has had an investment-banking relationship with Wyeth in the past three years.)

Wyeth was the leading maker of hormone-replacement therapy (HRT) products, which a study by the Women's Health Initiative linked to possible health problems. Those findings are all on the table, however, so no new surprises are expected. By early next year, sales of HRT -- now being used primarily for the short-term treatment of women with severe menopause-related problems -- should stabilize, Fuss says.

DRAGGING FOR A DECADE? Of course, the fen-phen litigation still casts a shadow. During the recent earnings call, Wyeth execs said they saw no need to boost remaining reserve of $3.4 billion. However, that's not to say Wyeth won't have to. In the more than five years since the lawsuits began, it has faced more than $16 billion in charges -- yet cases are still outstanding.

"My concern is that I can do the earnings projections and analysis on the pipeline, but when it comes to deciding on how litigation will impact the numbers, that hard to quantify," says A.G. Edwards analyst Albert Rauch, who fears lawsuits could drag on for another decade and that the eventual settlements might ultimately drain billions of dollars. He rates the stock hold. (Rauch doesn't own shares, and the firm has no banking with Wyeth.)

The issue of management credibility also has deterred investors. Essner, who was been at Wyeth's helm for nearly three years, inherited the diet-drug problems, but some investors figure he could have done more to mitigate the uncertainties. Rauch tried to put it diplomatically: "Sometimes, it's better to underpromise and overdeliver." That, he says, hasn't been Essner's approach.

"AMAZING" VALUATION. The CEO admits Wyeth has had its problems, but he claims the challenges have been met head-on. "We don't give up," he says. As far as fen-phen's lingering legal threat is concerned, he says: "We've handled this in a way that is absolutely appropriate and proper."

Increasingly, analysts agree. Says Eric Thorne, portfolio manager at Bryn Mawr Trust: "The valuation is amazing, and shareholders will do well with it as long they can withstand some volatility." (Thorne doesn't personally own the stock, but it is a holding at his firm.) At its current price, the stock that has taken its lumps with the fen-phen fiasco may be in for a bump. Tsao covers the markets for BusinessWeek Online in New York


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