FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan

Pfizer Flops on Fatal Fed Restriction

Shares of pharmaceutical giant Pfizer (NYSE: PFE) could use a little Viagra after slumping another $4 15/16 to $100 this morning in reaction to yesterday's negative news about its antibiotic Trovan. The stock swooned over $6 a share Wednesday after the mid-afternoon announcement that the Food and Drug Administration (FDA) will instruct doctors to limit the use of Trovan to patients with life-threatening infections because surveillance data has linked Trovan to potentially fatal liver problems. To reinforce the point, the FDA will restrict use of the drug to patients in hospitals and nursing homes, effectively pulling the plug on retail pharmacy sales.

Wall Street analysts frowned, with Bank of America cutting its rating from "Buy" to "Hold" and Salomon Smith Barney making an equivalent move from "Buy" to "Neutral." Introduced in the U.S. in February 1998, Trovan's Q1 FY99 sales jumped 50% to $61 million thanks to solid gains in the U.S. and early sales in international markets. It did $160 million in FY98 sales. Because of Trovan's effectiveness against a broad range of bacterial infections, many analysts expected the quinolone antibiotic would eventually deliver well over $1 billion in annual sales. That target now looks unlikely. Merrill Lynch has reportedly cut its FY99 sales target to $140 million from $300 million while Lehman Brothers has cut its projection to $190 million from $370 million.

The FDA's action follows reports that 140 patients have experienced liver damage while using Trovan. Fourteen of these cases resulted in acute liver failure. Of these, six patients died, three required liver transplants, three recovered, and two others are still receiving treatment. Pfizer tested the drug on 7,000 patients in clinical trials, but Trovan has since been used by over 2.5 million people, raising the probability that cases of serious toxicity would be found.

The bad news wasn't totally unexpected. Pfizer announced on May 26 that, after consulting with the European Union's version of the FDA, it had agreed to strengthen its product labeling to address the toxicity reports. It also indicated it was in "advanced discussions" with the FDA on revising its label in the U.S. And just last week, Ralph Nader's consumer watchdog group, Public Citizen, asked the FDA to ban the use of Trovan, arguing that there had been "clear evidence" of the drug's liver toxicity even in the data that had won Pfizer marketing approval. Still, investors didn't expect the FDA to make such an aggressive move.

Pfizer shares have been crushed since hitting an all-time high of $150 back in mid-April. While drug stocks in general have been out of favor in recent months, Pfizer has been hurt by fairly impotent demand for Viagra, its highly publicized drug for erectile dysfunction. First quarter sales of Viagra were just $193 million, down from $236 million in Q4 and about 30% below some analysts' estimates. Still, sales of Zyrtec, Pfizer's anti-allergy drug, shot up 54% to $126 million last quarter while revenue from its antidepressant Zoloft brightened 14% to $527 million. Pfizer has also enjoyed strong sales of its partnership products such as its cholesterol-lowering drug, Lipitor, and its arthritis drug, Celebrex, which should do well over $1 billion in sales this year.

Although the market is reacting to sharply lower-than-expected future revenues from Trovan, the drug accounted for just 1.6% of Pfizer's sales last quarter. On April 15, CFO David Shedlarz said the company was comfortable with FY99 earnings estimates of $2.40 to $2.50 per share, or slightly less than then current consensus estimate of $2.49. Still, that number represented 20% to 25% earnings growth for Pfizer, excluding charges and divested assets. While the target range may need another haircut, Pfizer is probably selling at around 42 times this year's earnings. That's not cheap, but given the premium valuations typically afforded pharmaceutical firms, Pfizer is certainly worth a closer look.

UPS

Food wholesaler and retailer Richfood Holdings (NYSE: RFH) packaged gains of $3/4 to $17 on last night's news that competitor SuperValu Inc. (NYSE: SVU) will expand from its Midwest power center into the Mid-Atlantic by purchasing Richfood for $18.50 per share in cash, or $1.5 billion including assumed debt. For more on the news, head back to today's Breakfast With the Fool.

E-mail direct marketing company MessageMedia (Nasdaq: MESG) got $2 1/2 to $13 7/8 on news that it agreed to buy online customer feedback systems company Decisive Technology for $50 million in stock. Yesterday the shares won $1 5/16 on news of plans to acquire privately held e-mail marketing software developer Revnet Systems for about $46 million in stock.

Water and wastewater systems manager Azurix Corp. (NYSE: AZX) trickled up $5/16 to $19 5/16 this morning. The company traded for the first time today after selling 36.6 million shares in an initial public offering for $19 each. The offering raised approximately $654 million in proceeds, of which $349 million is set to go into the pockets of selling stockholder Atlantic Water Trust, which is 50% owned by energy company Enron (NYSE: ENE).

E-mail direct marketing company MessageMedia (Nasdaq: MESG) got $2 1/2 to $13 7/8 on news that it agreed to buy online customer feedback systems company Decisive Technology for $50 million in stock. Yesterday the shares won $1 5/16 on news of plans to acquire privately held e-mail marketing software developer Revnet Systems for about $46 million in stock.

Cable modem supplier Com21 Inc. (Nasdaq: CMTO) plugged in $1 5/8 to $19 9/16 this morning after announcing the availability of its "Enterprise Telephony Solution," used for the set up and operation of virtual call centers, remote offices, and telecommuting operations.

Motorcoach service provider Coach USA (NYSE: CUI) sped up $3 11/16 to $37 3/16 this morning, complementing the stock's $2 15/32 move of yesterday. Just before last night's bell, the firm said it is in talks with an unidentified party regarding a "possible business combination" valuing the company at $42 per share in cash.

Wallace Computer Services (NYSE: WCS) added $1 1/2 to $25 1/4 after the provider of print management services reported fiscal Q3 EPS of $0.49, up from $0.42 last year and a penny better than the IBES two-analyst consensus. Operating margins were 11%, up from 10% a year ago.

Temporary manual labor company Labor Ready (NYSE: LRW) worked its way up $7/8 to $39 5/8 on news that it set a three-for-two stock split, which will be payable July 12.

DOWNS

Financial services holding company U.S. Bancorp (NYSE: USB) fell $1 to $30 3/4 on news it is being sued by the Minnesota attorney general for allegedly selling personal financial information for some 900,000 of its customers to telemarketing company MemberWorks (Nasdaq: MBRS) for $4 million plus commissions. MemberWorks, which isn't being sued, lost $3 7/8 to $38 7/8 anyway.

Snowbabies collectible figurines maker Department 56 (NYSE: DFS) was deep-sixed for a $5 7/16 loss to $26 5/16 after warning that "system implementation difficulties" are causing order-taking problems and will cause the firm to miss its stated goals of 7% to 9% sales growth and mid-teen digit earnings growth this year. Through June 8, the company said its total sales are $89 million, down 3% from last year's level. Goldman Sachs downgraded the firm to "market perform" from "market outperform."

Contact lens maker Ocular Sciences (Nasdaq: OCLR) continued its week-long slide this morning, losing $1/4 to $14 5/8 after issuing a blurry outlook for its business yesterday as growth in the domestic contact lens market dries up. In a conference call late in the day, CFO Gregory Lichtwardt reportedly suggested fiscal 1999 EPS of $1.50 and fiscal 200 EPS of $1.78 as worst case scenarios, below the respective First Call mean estimates of $1.66 and $2.11 for the periods. Morgan Stanley Dean Witter cut its rating on the firm today to "outperform" from "strong buy."

Elsewhere in the contacts biz, direct marketer 1-800 CONTACTS (Nasdaq: CTAC) was blindsided by a $3 1/16 loss to $17 after filing a registration statement for a secondary offering of 2.04 million shares, including 1.04 million shares to be sold by selling shareholders.

Enterprise software firm Computer Associates (NYSE: CA) skidded $3 to $48 1/2 on a pair of downgrades this morning. Prudential Securities cut its rating for the firm to "hold" from "accumulate" while Brown Brothers Harriman lowered its short-term opinion to "neutral" from "buy." The Pru also downgraded enterprise application software company BMC Software (Nasdaq: BMCS) to "accumulate" from "strong buy," sending the company's shares down $2 9/16 to $43 7/8.

Medical, disability, and special risks reinsurer ESG Re Ltd. (Nasdaq: ESREF) dropped $2 to $15 1/2 after Advest lowered its rating on the firm to "buy" from "strong buy" and Stephens Inc. issued a downgrade to "neutral" from "buy."

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Contributing Writers Brian Graney (TMF Panic), a Fool David Marino-Nachison (TMF Braden), a new Fool Editing Brian Bauer (TMF Hoops), another Fool Bob Bobala (TMF Bobala), a Fool's Fool Jennifer Silber (TMF Amused), Fool at last