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Catch Pfizer while it's on the mend
The drug company still faces problems, but with a host of promising new cancer drugs in the pipeline, growth should pick up -- making this a feel-good story for patient investors.
By Jim Jubak
If you're a patient investor who can stomach some degree of uncertainty, I believe I have a stock for you: Pfizer (PFE, news, msgs).
By no means is the drug maker out of the woods. The risks certainly haven't gone away. But 2005 looks like the bottom for the company, and Wall Street is likely to start anticipating a 2006 recovery in revenue growth sometime this year. My recommendation is to buy it now and keep adding to it on any weakness over the next two quarters.
Of course, youll need to make up your own mind, but let me spell out the pros and cons behind my recommendation.
I know that the safety of the company's COX-2 inhibitors, Bextra and Celebrex, has dominated the headlines for the last year. Pfizer finally pulled Bextra off the market at the urging of the U.S. Food and Drug Administration, which held that the drug offered no unique health benefit to offset its potential for life-threatening skin reactions and an increased rate of heart attacks. Celebrex has been relabeled with what is called a "black box warning" about its potential risks.
And that attention is appropriate. Celebrex was one of the company's biggest selling drugs, and Bextra was one of its most promising recent discoveries. In 2004, Celebrex sales came to $3.4 billion, up 75% from 2003. Bextra racked up $1.2 billion in sales. Now Bextra sales have dropped to nothing and Celebrex sales are projected to fall by 40% or more in 2005. In the first quarter of 2005 combined sales of the two drugs fell 55%. U.S. sales for Celebrex fell 31%.
Real problem was bigger
But the problems with these two drugs -- as headline-worthy are they were -- were just one part of a true growth crisis at Pfizer. And it's that crisis that finally led me to sell Pfizer out of Jubak's Picks last June at a 9.6% loss (after dividends). I had been a very patient investor: I'd held the stock in the portfolio since August 2001. But I just couldn't see holding any longer. The growth had just stopped at Pfizer, and I didn't see how the company was going to get it started again.
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That's because all of Pfizer's biggest sellers were under attack. Zoloft, the antidepressant that produced $3.4 billion in revenue for Pfizer in 2004, is due to come off patent in the United States in 2006. Zithromax, the company's best-selling antibiotic with sales of $1.8 billion in 2004, faces competition from generic versions in November 2005. Zyrtec, the company's best-selling allergy drug with $1.3 billion in 2004 sales, could lose patent protection in the United States in 2007. Viagra, the first erectile dysfunction drug, with $1.8 billion in 2004 sales, is losing share to Cialis and Levitra. And Lipitor, the Big Daddy, the heart of Pfizer's business with $10.9 billion in 2004 sales, is the subject of a lawsuit from Ranbaxy Pharmaceuticals, an aggressive maker of generic drugs that seeks to overturn Pfizer's patent.
Even assuming Pfizer wins the Lipitor case, and I think it will, that's a lot of revenue to replace. Ball parking the bad news gave me a total of $6.1 billion in lost annual revenue: $1.3 billion from Bextra, $1.4 billion from Celebrex (40% of 2004 revenue), $1.7 billion (50% decline due to generics) from Zoloft, $1 billion (conservatively) from Zithromax and $700 million from Zyrtec.
Of course, the total revenue picture is even worse because Pfizer doesn't merely need to come up with $6.1 billion in annual replacement revenue, but another $6 billion or so a year in growth revenue. Pfizer's sales growth over the last five years has averaged 11%. With annual sales of $53 billion in 2004, that amounts to adding $6 billion to revenue in 2005 to keep the record intact. It's that sales growth, plus very disciplined cost cutting, that powered Pfizer to average annual earnings increases of 20% over the last five years. The job of turning sales into earnings also looked like it was going to get harder for Pfizer as competition with generics lowered the company's margins. But given the magnitude of the company's revenue gap, I confess, falling margins didn't even make it onto my radar screen.
Promising pipeline
Now in early 2005, investors are starting to get the first glimmer of hope that Pfizer might be able to fill that gap. And the hope is coming from an unlikely source. Pfizer is known as a great acquirer of other drug companies, as a great marketer of drugs discovered by other companies, and as a great cost-cutter after acquisitions. But it doesn't have a reputation as a great drug discovery house. That's Merck (MRK, news, msgs)'s reputation.
But it looks like Pfizer's salvation will come out of its research and development pipeline. At the end of 2004 the company was working on 130 new molecular entities identified as possible drugs and 95 projects to find new uses for existing drugs. The company has committed itself to a punishing schedule of submitting one new drug application a quarter to the U.S. Food and Drug Administration through 2006 and initiating one new licensing deal or development alliance every two weeks.
Swell, on paper, you say, and bravo to management for its commitment. But show me promising drugs now in clinical trials.
That's what I wanted to see, too. And that's exactly the kind of evidence that's started to emerge in the last few months. A promising array of cancer drugs, acquired when Pfizer bought Pharmacia two years ago, has started to get the buzz on the oncology conference circuit.
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