OUR TAKE
Pfizer's Outlook Improves

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By Jeff Fischer (TMF Jeff)
June 17, 2003

Having spent $5 billion on research and development in 2002, Pfizer (NYSE: PFE) is king of the drug world. And with its $60 billion Pharmacia merger completed in April, the king just got fatter.

The newly formed Pfizer held its first analyst meeting today and projected lower-than-expected results in 2003 but stronger results in 2004, sending the stock higher.

The company estimates earnings per share of $1.73 this year -- down from expectations of $1.80 -- due to excessive inventory at Pharmacia. But in 2004, management projects earnings growth of 23% to $2.13 per share, on revenue of $54 billion. Average estimates sought only $2.06 in earnings on $52.4 billion in revenue.

Combining 2002 results of Pfizer and Pharmacia, the merged company's 2004 estimates represent 16% compound annual earnings growth from 2002 and 10% compound annual sales growth -- significant top- and bottom-line expansion from a $280 billion operation.

Pfizer's stock price looks all the more attractive given the new guidance. At $35, the world's premier drug company trades at only 16.4 times 2004 estimates, a discount to the S&P 500 and to other strong drug peers. Johnson & Johnson (NYSE: JNJ) trades at 18.5 times 2004 estimates, while Novartis AG (NYSE: NVS) fetches 20 times.

Can Pfizer continue to grow by double digits? Most of its large drugs are years from patent expiration, while additional growth will depend on the introduction of new blockbusters and novel uses for existing drugs. Lipitor, its bestselling cholesterol drug, might treat diabetes, while one of its most promising drugs in trials helps people stop smoking.

Pfizer has more than 80 compounds in phase I and phase II human trials. According to FDA statistics, phase I drugs have a 20% chance of eventual approval, while phase II drugs have a 29% chance. Odds jump to 60% when a drug enters phase III. If any pharmaceutical giant is poised for double-digit earnings growth well  into the future, it's Pfizer.

Jeff Fischer owns positions in Pfizer and J&J.

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