Dueling Fools A Duel Over Pfizer
Bear Argument

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Dueling Fools
By Rick Aristotle Munarriz (TMF Edible)
July 18, 2001

Ever since Pfizer was able to steal Warner-Lambert away from American Home Products (NYSE: AHP) at the altar, despite the $1.8 billion penalty for the runaway bride, folks have been drooling over the magnitude of Pfizer. With the legal pairing of the two fastest-growing research-driven drug stocks at the time, it was a marriage of speed freak titans.

So, sure, Pfizer now commands the largest market cap of all the pharms. But, hey, that's not even good enough for the bronze in terms of total trailing revenues in the industry. Why does the company deserve an oh "Zo loft-y" valuation? Yes, there were costs to be shaved in the name of synergy. That will translate into an extra $1.2 billion in savings this year. Fine. Yes, the new Pfizer became the first pharmaceuticals company with eight billion-dollar products last year. That's great. But what does Pfizer do for an encore?

While the company earned $0.33 a share in its first quarter this year, it is only expected to earn between $1.27 and $1.30 this fiscal year. Sequentially speaking, the company's first quarter was as good as it gets. Even the bullish analysts concede that earnings growth will slow next year.

Margins have taken a meaty pop to the upside now that Warner and Pfizer are one. But that's a card you can only play once. Pfizer appears to be growing faster than it really is right now, and that illusion won't last beyond this year. While Mike may have bragged about Pfizer's earnings growth in the first quarter, revenues only rose by a scant 7%. This isn't some random quarterly pause in Pfizer's frenetic growth cycle. The top line rose by just 8% last year, too.

But what's frightening if you're a Pfizer fan is that every single segment in the company's consumer products and healthcare operations dipped during the period. I know, this is Pfizer's margin sandbag business, but it's in trouble. From Schick shaving products to Tetra fish items to brands like Listerine and Chiclets, they all tanked as categories during the quarter. Yes, Pfizer makes Visine, but that doesn't mean it can take the red out of its fading position in the consumer space.

But will the healthcare side see Pfizer through? Last week, Sanford Bernstein analyst Richard Evans downgraded Pfizer after noting the second-quarter deceleration of the company's three biggest products -- Lipitor, Norvasc, and Zoloft -- lines that make up nearly 40% of total company sales. Slowing growth despite aggressive promotion? That can't be good.

Welcome to life on the pharm. Spin the roulette for a breakthrough, milk it until its usefulness becomes obsolete or patent expiration tosses it into battle with generics, and move on. So while you hear a drugmaker throw around a lot of names, you'll be hard-pressed to find them a few annual reports later. Just ask Pfizer why it stopped making diabetes treatment Rezulin or its Trovan antibiotic last year. It's just the way the game is played.

I won't fault Pfizer on that front. It is doing its best to look ahead by pumping up the R&D spending something fierce. But you better be patient, doctor. Not only are approved breakthroughs rare, the pipeline journey itself can be a slow, draining, dozen-year process. 

But why is Pfizer the most richly priced drug company? It's not the revenues, since Pfizer gets trounced on that front by companies fetching fractions of Pfizer's multiples. It's not the products, either. The company's top-selling drug right now is its Lipitor high cholesterol treatment. But is it the top dog in the industry? Not really. While it's on track for a $6 billion year, so is Merck's (NYSE: MRK) cholesterol-modifying Zocor. Also, while it still has a few hurdles to clear before going to market, AstraZeneca's (NYSE: AZN) CRESTOR is claiming to produce lower cholesterol levels than Lipitor.

Zoloft is not the only antidepressant out there. Eli Lilly's (NYSE: LLY) Prozac, Glaxo SmithKline's (NYSE: GSK) Paxil, and Forest Labs' (NYSE: FRX) Celexa serve the antidepressant market and the generics are marching in.

Pfizer's Viagra has become that rare drug name that gets embedded into pop culture, but it's not going to be standing alone for long in the field of erectile dysfunction. ICOS (Nasdaq: ICOS) and Eli Lilly are readying for the rollout of Cialis, while Bayer (Nasdaq: BAYZY) and Abbot Labs (NYSE: ABT) also have impotence drugs in development.

But the real problem here isn't only that Pfizer has strong, growing competition in most of its markets. The stock is just flat-out overvalued in a sector that has been bid up plenty anyway as investors have flocked to it as both a growth sector in good times and a safe haven in bad times. I'll elaborate a bit on this in my rebuttal. In short, I hope Pfizer has a treatment for the fear of heights somewhere in its pipeline. For Mike's sake, I hope that treatment isn't gravity.

For now, let me just close with one interesting factoid. Pfizer makes Bubblicious chewing gum. Yes, the company knows how to make bubbles. Trust me, you don't want to be near it when it pops.   

Rick Aristotle Munarriz thinks that a spoonful of sugar will make the medicine go down. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.

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