Dueling Fools A Duel Over Pfizer
Bull Rebuttal

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Dueling Fools
By Mike Trigg (TMF Tonto)
July 18, 2001

The humidity in Miami must be getting to Rick at this point in the summer, which perhaps explains his far-reaching bear argument. I was wrong to assume he would concede the company's blockbuster billion-dollar drugs and stacked pipeline leave it well positioned for additional growth. And while I knew valuation would come into play, he only backs up his argument with a few strange comparisons to chewing gum and gravity.

I agree with Rick that the pharmaceutical industry breeds product obsolescence. Patent expiration is a risk investors are forced to contend with, but certainly Pfizer isn't the only company that must deal with such issues. Eli Lilly's Prozac, Schering-Plough's Claritin, and Merck's Vasotec are blockbuster drugs that will lose patent exposure before 2002. All drug companies are forced to deal with losing products that generate tremendous revenues.

Rick's claims about new drugs taking sales away from Pfizer's top revenue-drivers suggest the company doesn't have any new drugs to make up the difference. I could easily have spent my whole argument talking just about Pfizer's stellar pipeline, but the company also has recently launched and soon-to-be launched drugs that will drive additional sales. Its schizophrenia drug Geodon, for instance, could quickly reach $1 billion, while taking share away from Lilly's Zyprexa.

Turning to price, I think I made a pretty compelling argument that Pfizer could easily post 10% annual returns over the next five years. Not surprisingly, Rick pointed to the company's P/E ratio. But as you can see from the numbers below (taken from the end of the calendar year), Pfizer has never been cheap, and as I pointed out, it currently trades in line with its five-year average.  

PFE       '00    '99    '98    '97    '96 
P/E        45     39     62     45     28

Investors willing to overlook the company's P/E ratio of 45 at the end of 1997 have been rewarded with a 66% total return. Since the end of 1999, when Pfizer traded at a P/E of 39, the company has returned 25%. Good companies like Pfizer often look pricey.

Truthfully, I think the biggest question with Pfizer comes down to future products. Clearly, it's the top pharmaceutical company in the world and increased sales of current drugs will provide significant growth for the next two years. But its long-term future will come down to new drugs. Given its size, it must focus on huge revenue drugs. With an annual R&D budget that nearly doubles much of its competition, I have long-term confidence in the company.

Of course, people like Rick probably questioned whether Tyson would beat Spinks.  

Mike Trigg owns shares of Pfizer, but didn't know the company made Bubblicious. His other stock holdings can be viewed online, as can The Motley Fool's disclosure policy.

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