Dueling Fools A Duel Over Pfizer
Bear Rebuttal

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

Mike Tyson? Is that the best endorsement my Foolish foe can dig up? Hey, since ear cartilage is probably high in cholesterol, maybe Pfizer can fast-track a Zoloft-Lipitor cocktail for our buddy Tyson. What do you think?  

OK, let's get serious and dig into valuation, because Mike seems bent on turning Pfizer into some magical fixed-income instrument with a guaranteed 10% annual yield. Right, as if anyone is going to be paying 40 times earnings for a company growing its top line at a paltry 4.5% rate in an industry that is becoming more and more regulated. Snap out of it!

Mike mentioned that Pfizer was "the world's largest pharmaceutical company," but that is only in terms of market capitalization. Yes, multiply Pfizer's overpriced share price by a whopping 6.3 billion shares outstanding and you get a sum second to none among the drugmakers. However, Merck, Johnson & Johnson, and Novartis (NYSE: NVS) have all rung up more sales this past year than the topic of this week's Duel.

Why is Merck, with nearly 1 1/2 times the trailing 12-month revenue as Pfizer, worth $100 billion less? Is it because Pfizer is spending a billion more on research this year? Of course not. Is it because Pfizer's existing drug portfolio has a longer patent life? Perhaps, in part, but I think one is being naive if the onslaught of generics is all a company has to worry about in terms of competition and pricing pressure.

No, I think Pfizer is priced as high as it is because it has popped one Viagra pill too many. That's a dangerous condition to be in when valuation sustainability comes into play. It's out of whack with an industry that isn't exactly cheap.

However, the scariest of Mike's assumptions is that margins will continue to fatten like some prized calf over the next few years. Yes, I'll concede the obvious near-term improvement post-merger. But am I the only one who is worried about an industry bragging about "extremely high profit margins" when those bills are being footed by the government, insurance companies (i.e., you), and gouged consumers?

I'm not going to burn Ayn Rand novels and deny the pharmaceuticals the right to make what they're making. That's not me. A drug company like Pfizer deserves to reap the rewards of the rare winners to offset the billions that will be spent fruitlessly. But the government is getting weary of paying the tab. Just last month, Pfizer had to agree to provide management services to chronically ill patients in Florida in order to be on the state's Medicaid preferred list. More brokered quid pro quo deals like this are on the way as the country hammers away at falling drug prices. That's good for taxpayers and consumers. That's not good for companies like Pfizer, who were already reporting pretty weak sales growth.    

Stay away from Pfizer. The risk is just not worth the limited upside right here. You want to know why I'm down on Pfizer? In the words of Mike Tyson, "to keep me from killing y'all."

Rick Aristotle Munarriz thinks that Pfizer is holding back on a cure to the common cold. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.

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