Drip Portfolio Report
Thursday, September 11, 1997
by Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA (Sept. 11, 1997) -- Pfizer produced 90% of the penicillin carried ashore at Normandy on D-Day, and the company is still a leader in antibiotics today. As noted yesterday, Pfizer's goal is to become the leading research-based healthcare company in the world. It ranked 13th in size five years ago, and is now ranked 6th.

The company's research and development spending has increased at a compound annual rate of 18% over the past ten years. Over that time, the company grew sales every year, steadily, from $4 billion in 1986 to last year's $11 billion, while margins have improved steadily as well. Pfizer has thirteen new chemical-based products in late stage development or under regulatory review, and fifty-three other such products in early or mid-stage development.

PFIZER (NYSE: PFE) divides itself into three main divisions:

1. Health Care
   a. Pharmaceutical
   b. Hospital products

2. Animal health

3. Consumer Health Care
   --OTC and others

Of $11.3 billion in sales last year, $8 billion were pharmaceutical, $1.4 billion hospital products, $1.2 billion animal care (the company is the leading animal healthcare company in the world), and $456 million came from consumer healthcare sales. Pfizer, somewhat oddly, also has a banking operation called Pfizer International Bank Europe, which provides credit to financially strong companies.

While pharmaceutical sales at SCHERING-PLOUGH (NYSE: SGP) account for 90% of total sales, they account for 70% of total sales at Pfizer. Schering-Plough is a leader in allergy and respiratory drugs, while Pfizer is a leader in cardiovascular and infectious diseases drugs.

In 1996 cardiovascular drugs (Norvasc, Procardia, Cardura) accounted for $3.4 billion, or 30%, of Pfizer's total sales. Infectious diseases drugs accounted for 20% of sales. The company is also a leader in central nervous system disorder treatments, and sold $1.3 billion worth of such drugs, or 10% of total sales. Pfizer also sells drugs treating diabetes, allergies, arthritis, and other ailments, but in much smaller amounts. The big three -- heart, infection, and central nervous system -- are the three that matter most.

As heart problems are the leading cause of all "bad things" in the world (i.e. disease and death) (50% of all deaths in developed countries are related to heart trouble), Pfizer apparently chose the market smartly, and has ever since been helping the situation. The death rate from heart disease has dropped 40% in the United States over the past three decades, even as the occurrence of the disease has increased. Better healthcare options (including Pfizer's blood pressure and angina medications) have certainly helped both to prevent heart attack and to let victims live healthy lives afterward.

The cardiovascular industry continues to grow, while Pfizer's pharmaceutical sales as a whole grew 16% last year, and hospital product sales grew 8%. The company had 37% net profit margins in these combined segments.

The company's third-largest division is animal healthcare. Sales in this division were flat last year due primarily to farmers (this is woeful) ordering less livestock medicine because of high feed costs and low cattle prices. Beef consumption also decreased following last year's mad cow disease (which hit Randy, I think), but trends predict long-term growth in medicinal demand for farm animals. Poultry, hogs, sheep, you name it. Goats. Horses. More than 30 billion broiler chickens are processed every year in this world. That's 6 chickens per person. There are one billon cattle in the world -- one for every five people. There are 750 million pigs, 850 million sheep... (okay, enough with the numbers). Pfizer leads in animal healthcare, with $1.2 billion in sales each of the past two years, up from $600 million in 1994. The company had nearly 10% net profit margins in the segment last year.

Unlike Schering-Plough, Pfizer experienced sales growth in its consumer healthcare division last year. This is the company's smallest division. Sales rose 15% in 1996 to $454 million. (The year before, though, sales were down 4% -- the industry is touch and go, with price decreases sometimes eating at sales volume increases.) Pfizer's leading consumer brands include Visine, Unisom, BenGay, Cortizone, and the Bain de Soleil sun care line, which was acquired from Proctor & Gamble in 1995. Pfizer had 8% net profit margins in this division last year.

Margins at Schering-Plough are highest among our healthcare choices because 90% of sales are pharmaceutical. With just over 70% of its sales being pharmaceutical, Pfizer's margins are close behind, though, and the added diversity of business at Pfizer might be considered a plus, as long as the other divisions can continue to grow profitably.

We're out of time for this recap, but we're not finished with Pfizer. We'll have a "part two" on Pfizer before we lead into Abbott Laboratories. We have the eight-item checklist to run through, too, on Pfizer. When this entire process is complete we should know our four healthcare considerations quite well.

Fool on!

--Jeff Fischer