Wednesday, April 08, 1998

Cash-King Portfolio Report
Phil Weiss

TOWACO, NJ (April 8, 1998) -- One of the questions that often comes up about a company like Pfizer (NYSE: PFE) is why would we (or anyone) buy a stock with a trailing price-to-earnings ratio of 55 and a mean estimated 5-year earnings growth rate of approximately 17% per year? That's Pfizer's present circumstance. It's priced at 55x earnings with a projected annualized growth rate of 17%.

One reason we've purchased Pfizer is its superior stable of drugs currently under patent. Another is its outstanding pipeline of new drugs. Combined, these could provide substantial flows of capital through the business over the next decade. Tonight I’m going to talk some more about the company’s top-selling drugs as well as about which drugs are expected to be among its top-sellers in 3-5 years.

Let's look at their hottest drugs by category.

                 Fiscal 1997     
 Norvasc          $2.2 billion 
 Procardia XL     $822 million 
 Cardura          $626 million 
 Total            $3.8 billion 
 Diflucan         $881 million  
 Zithromax        $821 million 
 Total            $2.5 billion 
 Central Nervous 
    Sys. Disorders  
 Zoloft           $1.5 billion          
 Total            $1.6 billion 
 Zyrtec/Reactine  $265 million 
 Total            $273 million 

Fools, the company has some great products. As a matter of fact, the general rule of thumb is that sales over $1 billion classify a drug as a blockbuster. So, Pfizer currently has 2 blockbuster drugs: Norvasc, for controlling blood pressure and angina, and Zoloft, for treating depression.

Pfizer also has a few drugs on the cusp of blockbuster status (though not all heading higher): Diflucan, to treat serious infection; Zithromax, to treat respiratory tract and skin infections; and Procardia, also controlling blood pressure and angina. Those three non-blockbusters added up to $2.5 billion in sales for 1997. Pretty impressive.

But, there are no guarantees. One must ask: Will the sales of these products continue to grow and how long before these products lose their patent protection? And, on the upside, are there possibly alternative uses for these drugs? Also, what sort of new products are on the horizon?

An important piece of information that I obtained from Pfizer’s Investor Relations department is that 61% of Pfizer’s sales are of products with patents that do not expire before 2004. Patent protection provides one of the key means by which a pharmaceutical company can sustain revenue growth as demand broadens. Beyond this, we really have to go by category to assess the defensibility and possibility of Pfizer's business model.

Let's start with the cardiovascular-disease products. According to the 10-K report, these products treat problems affecting the heart and the blood circulatory system. As noted before, the largest selling product in this group is Norvasc, which became the best-selling high-blood-pressure product in the world in 1997. Norvasc is a once-a-day medication used to treat hypertension and heart pain. And, according to Pfizer, studies are currently underway to expand the applications of Norvasc to include treatment of certain types of congestive heart failure.

Procardia XL is Pfizer's #2 cardiovascular product and is also a hypertension drug. But this drug is no longer detailed to doctors, since Pfizer believes that Norvasc is the more effective way to treat high blood pressure. In addition, Procardia will be facing generic competition in the near future. In other words, these $822 million in revenues are on attack from all sides. You wouldn't want to be working at Pfizer with 50% of your 5-year compensation tied to Procardia sales.

Next up is Pfizer’s infectious-disease category, where the product with the greatest potential is Zithromax. An oral or injectable antibiotic used to treat a broad range of infections, Zithromax is currently Pfizer’s second best-selling infectious-disease product. According to Investor Relations, the future sales growth of this product could come through approval in Japan. Also, there's exploration into the possibility of a new application for the drug: to fight atherosclerosis in post heart attack patients. The product is also in Phase III trials for treatment against another bacterial infection.

Pfizer’s leading product for the treatment of central nervous system disorders is Zoloft, which is used for the treatment of depression, obsessive-compulsive disorder, and panic disorder. Right now, this product has only been approved for panic-disorder treatment in the U.S.; however, the company is currently seeking approval for Zoloft around the world. In addition, Pfizer is trying to get approval to sell this drug in a liquid form as well as looking to expand its uses to include disorders such as post-traumatic stress, pre-menstrual syndrome, and premature ejaculation.

The next thing that I asked Investor Relations was what did Pfizer expect to be its Top 5 drugs in terms of revenues 3 to 5 years in the future. I was informed that, naturally, the company doesn't provide information on projected sales, but I did learn that they expect the Top 5 drugs five years from now to be Norvasc, Lipitor, Zoloft, Viagra, and Celebra.

You know two of those. But what about the other three?

First, Lipitor is a cardiovascular drug used to lower cholesterol. In 1997, it rang up sales of $865 million. Lipitor doesn't appear on our revenue listing above because it's sold under co-promotion and license arrangements with Warner-Lambert (NYSE: WLA). The two companies share the revenue from this product. At the end of 1997, Lipitor was sold in the U.S. and 14 other countries, and it will likely be launched in more than 12 additional countries in 1998. Currently, 30.2% of new prescriptions for cholesterol lowering drugs in the U.S. are for Lipitor. Meanwhile, only 25.8% of current prescriptions are written for current market leader Zocor -- manufactured by Merck (NYSE: MRK). The outlook for Lipitor is outstanding.

Elsewhere on the Future Top Five, Celebra is a prospective entrant into a new painkiller market. It's part of a new class of drugs called COX-2 inhibitors. This new class of drugs has an advantage over existing pain treatments -- they're far less likely to cause the sort of serious stomach disorder that often result from competing treatments.

Of Pfizer's future greats, Celebra is the one furthest from generating significant sales. If one were to look forward three years instead of five, Celebra still wouldn't be on this list. Five years out, though, it is. Investor Relations told me that this market currently has sales on the order of $8 billion annually. So, it’s easy to understand why Pfizer is excited by this product and its future prospects.

Last, but not least, is the drug that everyone seems to have heard of these days -- Viagra -- a pill that can be used to treat impotence. Viagra isn't the first approved treatment for impotence. However, it is the first in the much-preferred pill form. The other treatments require the patient to make injections into their urethra.

Based on all published reports and commentary, such as the story on ABC Television’s 20/20 on March 20, 1998, (click here for the 20/20 Transcript on Viagra), the drug will be a big success. As a matter of fact, I've read sales forecasts for Viagra as high as $6 billion annually. It's anticipated that Viagra will be sold for $7 per pill at the wholesale level. There have been some questions about whether or not insurance plans will reimburse patients for Viagra. I asked the IR department what Pfizer’s take was on this situation; they said it may vary from plan-to-plan, but they expect there to be patient pressure placed on those plans that decide not to cover this medicine.

All this is pretty amazing for a drug that was discovered by accident. The original plans were to study the viability of this compound -- sildenafil citrate in pill form -- as a drug to relieve the chest pain of heart disease. The compound didn't work as had been intended; however, during trials, some male patients taking Viagra found that it resulted in prolonged or enhanced erections.

Imagine the bizarre there, Fools.

In addition to the drugs listed above, Pfizer expects to release a few other promising drugs approved this year. This year’s annual report also states that the company currently has 55 new compounds in early phases of development. Based on Pfizer’s track record and its current research and development budget of more than $2 billion, it seems likely that our company will continue to grow its revenues heartily in the future.

That’s about all that we’ve got time for in this report. I hope that this has given you a better understanding of the company's top products. If you'd like to discuss any of this further, please post your comments on our Message Boards: Cash-King Folder and Pfizer Folder. Also, for those of you that haven’t read our buy report, you can check it out here: Pfizer Buy Report.

Have a Foolish night,

Phil Weiss


Stock  Change    Bid 
 CHV   -1 7/16  79.06 
 KO    -  15/16 78.06 
 EK    +  7/16  63.94 
 XON   -1 3/4   66.13 
 GM    -  1/4   66.56 
 INTC  -  1/16  72.56 
 MSFT  +1 5/8   88.88 
 PFE   -1 13/16 98.75 
 TROW  -  3/4   71.50 
                  Day   Month    Year  History 
         C-K      -0.49%  -0.93%   2.98%   2.98% 
         S&P:     -0.71%  -0.01%  10.02%  10.02% 
         NASDAQ:  +0.46%  -1.56%   9.32%   9.32% 
     Rec'd    #  Security     In At       Now    Change 
    2/3/98    22 Pfizer        82.30     98.75    19.99% 
    2/3/98    24 Microsoft     78.27     88.88    13.55% 
    2/27/98   27 Coca-Cola     69.11     78.06    12.96% 
    2/6/98    28 T. Rowe Pr    67.35     71.50     6.17% 
    3/12/98   20 Exxon         64.34     66.13     2.78% 
    3/12/98   20 Eastman Ko    63.15     63.94     1.25% 
    3/12/98   15 Chevron       83.34     79.06    -5.14% 
    3/12/98   17 General Mo    72.41     66.56    -8.07% 
    2/13/98   22 Intel         84.67     72.56   -14.30% 
     Rec'd    #  Security     In At     Value    Change 
    2/3/98    22 Pfizer      1810.58   2172.50   $361.92 
    2/3/98    24 Microsoft   1878.45   2133.00   $254.55 
    2/27/98   27 Coca-Cola   1865.89   2107.69   $241.80 
    2/6/98    28 T. Rowe Pr  1885.70   2002.00   $116.30 
    3/12/98   20 Exxon       1286.70   1322.50    $35.80 
    3/12/98   20 Eastman Ko  1262.95   1278.75    $15.80 
    3/12/98   15 Chevron     1250.14   1185.94   -$64.20 
    3/12/98   17 General Mo  1230.89   1131.56   -$99.33 
    2/13/98   22 Intel       1862.83   1596.38  -$266.46 
                               CASH   $5666.26 
                              TOTAL  $20596.57 
 *The year for the S&P and Nasdaq will be as of 02/03/98