Drip Portfolio Report
Thursday, October 2, 1997
by Jeff Fischer (TMF [email protected])

ALEXANDRIA, VA (Oct. 2, 1997) -- Many of you sent email with your thoughts on which healthcare company you like best. Because all of us together know more than any one of us alone, I think it's very worthwhile to share as many of your collective thoughts as possible.

Following yesterday's recap, readers know that we're deciding between PFIZER (NYSE: PFE) and JOHNSON & JOHNSON (NYSE: JNJ). I like Pfizer's current drug portfolio and its pipeline of coming products, as well as its goal of becoming the largest research-based healthcare company in the world; but I also like Johnson & Johnson's diversity, industry leadership, and a valuation that's more in line with its current business. Pfizer has a lot of good news already built into the stock price. With half the sales of Johnson & Johnson, Pfizer has a larger market cap. Current valuation is the least important consideration, having a 20 year time horizon, but it is an issue.

Subjects that we haven't yet addressed -- and that may be final deciding factors -- are the international markets (all four of our companies are largely international), and possible changes in healthcare legislation as well as HMO policies regarding prescription drugs. After sharing email from readers today and possibly tomorrow (there is more email in the pipeline to read), we'll come to these final thoughts.

Some of you are anxious for a decision, but we're attempting to do this in "real time," and it's working. The decision will essentially be made in this column, as it's written. That said, today Randy and I talked about the two companies over lunch. (We needed to talk off-line at some point. What we accomplished today was we determined what to analyze next in order to wrap this up.) What we finally decide to buy (online and fully explained) doesn't really matter, though. Many readers have already made their decision -- and that's exactly the point. That's Foolishness. Happily, most people have remembered that we're not making "suggestions" here, we're only making decisions -- decisions that are for this portfolio.

Thank you to everyone that sent email. Below is the portion of it that could be shared today. Each individual email is numbered. Very Foolish and interesting, all of them. Enjoy...

1. I think JNJ would be a more prudent choice for the second stock (following Intel). Granted it is a larger and more conservative choice but at these market valuations, especially PFE's, our downside is less. I think it's very likely though that you could have PFE be your next drug co. once you've rounded out your portfolio with a few more stocks. Since you're dripping, you could have a nice ten stock portfolio... and PFE would certainly be a logical investment in the portfolio for the long haul.

2. Concerning ABT vs PFE... Two observations:

1 - My wife has worked in the same hospital for 22 years.
2 - I have been on a prescription medication for 5 years and will be the rest of my life (Hytrin).

A surgical procedure uses supplies once, a prescription for high blood pressure is forever. I am sure I've paid more into the prescription kitty than the medical supply. I am 50 and will be on drugs a long time (I hope!). I just saw a presentation by PFE at an NAIC Investor's Fair. Their pipeline is awesome as is their research commitment. My next buy is PFE.

3. Call me a fool but I like the diversification of the JNJ product line. As the boomer population gets older you can bet that they will be using more JNJ products. Of course, the same can be said for Cardiac rehabilitative drugs. Nonetheless, not everyone will have heart problems and everyone will need a Band-Aid.

4. I have to agree with your choice of Pfizer. For the long term, R&D is the best investment. As a physician there are several other strengths of the company which you didn't mention -- they have a very aggressive and knowledgeable sales force. They also develop niche drugs -- Aricept for Alzheimer's and a new oral drug for impotence. No other company has viable drugs for these very common, disabling disorders. In the twenty year horizon this is an excellent choice. But then again, you never want to take investment advice from a doctor.

5. As you mention, probably any of them would be suitable candidates but based on the data presented, I would choose Johnson and Johnson. I base the decision on the relative valuation of JNJ to the other candidates, pe's and p/s. I like the balance of the three divisions within the company's revenues and I particularly like JNJ's consumer products division providing the general public with some knowledge of the company, even if it is a tiny piece of it... I like JNJ because they spend the most for R & D in absolute dollars. And I like JNJ because they have a ton of cash which provides many possibilities for buying good R & D from others. I like JNJ because they are the market leaders, considered the biggest and baddest in their category, another of the Fool precepts as I understand them. As you said, you have four good companies from which to choose and you (probably) can't make a bad decision.

6. The thing that is the most striking to me is that we are about to make a 20 year choice, yet you're hedging on your favorite pick based on current valuation. It will take a significant period of time given the $100/mo budgeted for this portfolio to build up a meaningful position. Why not go with your gut and your number one choice. After reading your own analysis Pfizer appears to be the gold standard. While all four companies represent great long-term growth opportunity, Pfizer is the one best suited to meet the original criteria you set forth before we started down this road. Buy the best and the valuation will take care of itself! IMHO I think you want Pfizer. No matter what happens, that is the direction I am headed.

7. After reading through your writings, I have decided to go with Schering-Plough. Their profit margin is better and when it's all boiled down, I think that's one of the most important things to look at. I don't disagree with your writings, but we're hoping SGP looks better in 20 years than the rest.

8. As a freelance stage electrician, who happens to occasionally work for the A-V company that Pfizer hires, I get to set up and operate lights and slide projectors for their analyst meetings. In other words, I get paid to attend Pfizer's analyst meetings. This no doubt biases me, simply because I am much more informed about Pfizer's operations than any of our other considerations, but I am impressed by what I know. For example, earlier this year, they released a new product in conjunction with another company (I can not remember the product name, the other company's name, or the indications for which the product is prescribed -- Hey! I wasn't looking to invest in them at the time! I was just making a living and snarfing a free breakfast off their hospitality setup.) Anyways, after 12 weeks, this product was the unquestionable dominant product for its indications, making up something like 92% of new prescriptions. A company which can introduce products that effectively, with its solid history of growth and its considerable pipeline is the choice for me. I will be chosing PFE as my healthcare DRP regardless of the Fool's decision. I'll be mailing out the check to Temper in a couple of weeks.... (Pfizer's) stated goal is to become the number one R&D pharmaceutical, and, given their substantial growth in recent (decades), they have demonstrated that their business model works. I'm also impressed with their pipeline of new products.

9. I'm a physician and pharmacologist and I have followed the drug companies for 20 years. I have made money on all the big companies, but Merck and Pfizer are the industry leaders in my opinion. Pfizer: The company has great drugs. Zithromax has a very broad spectrum. It is the drug of choice for many outpatient infections, it has much less GI side effects than erythromycin, and the once a day 5 day course is so convenient. The anti-senility drug has a potential huge market as does the impotence drug (viagra), though I question the efficacy of both. The co-marketing of Lipitor with Warner-Lambert will bring in big money to W-L, but PFE will see a few bucks too. Finally, as you mention, the pipeline of new drugs is full. The company has a history of bringing in winners (like Zithromax) so why not stay with the hot lab? ....Hillary gave us a BIG buying opportunity when she tried to federalize medicine and the drug stocks have been heading up ever since she abdicated her appointment as Health Czar and started (instead) misplacing her legal files.

10. I agree with your summary on all of these stocks. A wonderful analysis, and I am glad to see that you did not include current valuation in your analysis. The only thing that concerns me about your final decision is that Pfizer is currently the "hot stock" on Wall Street. I think that our current opinion of the stock may be a little bit too rosy. It is a wonderful company, heading the right way, but I would favor Johnson and Johnson for a few reasons:
1) Phillip Fischer lists as one of his criteria growing management from within. I think Johnson and Johnson consistently builds it management from its own ranks much like Motorola and Proctor and Gamble. This is a real asset in a stock that you are going to be holding 20 years.
2) Corporate Responsibility -- Johnson and Johnson has a reputation for being a good neighbor, in such things as leading the list of positive environments for women to work. This might hurt margins in the short run, but I believe it will be a major advantage in the 20 year time frame.
3) Benjamin Graham said (in the Intelligent Investor i believe) that one of the largest factors in a stock recovering from a depression (20% market drop) is goodwill, especially in the form of name recognition and reputation. It is an advantage that it should maintain over Pfizer, although Pfizer will most certainly increase in reputation over the next 20 years.

So I think that I would choose Johnson and Johnson first. (But truth be known I chose Medtronic over any of the four!)

11. I like Pfizer (1st choice) and Abbott (2nd choice). Pfizer for essentially the same reasons you stated, along with the company's stated goal of being the number one company in their field in 5 years. They are putting their money where their mouth is (R&D investment). Since the pharmacutical portion of the business creates the biggest margins, I believe that gives Pfizer the potential for the greatest long term growth.

Abbott diversification impressed me along with their return on equity. Although their percentage of R&D investment is not as high as Pfizer, it is greater than JNJ and positions them for continued growth.

12. Although I'm a lawyer, most of my friends are doctors and I enjoy their company here in Brussels, the capital of Europe. At a recent dinner I asked a few of them if they had any idea about a new medical or pharmaceutical product at development stage, that might be worth investing in the manufacturing company. One of them, a gynecologist, mentioned a brand new drug, still in the limbs, called Sildenafil, reported to be the first effective oral remedy ever against masculine impotency. It took me just a little search on the Internet to realize that he was talking about Pfizer's Viagra, now officially submitted (a few days ago) for official market admission in the US and European Union. Whatever Pfizer's current fundamentals are, my understanding of human behaviour, especially male behaviour, inclines me to think that this product is going to be a "killer app" in its field, which is very broad indeed. Although initially intended solely for diabetic ailment cure, Viagra is likely to be bought (by a much larger field)...

And finally, perhaps the best summary of the whole situation...

13. I think you hit the nail on the head when you wrote that you wouldn't be afraid of owning any of the four companies over a twenty-year time horizon. I lean toward Pfizer for the same reasons you mentioned in your article; however, the analysis could be repeated three or four years from now and Abbott Labs could be the favorite. Three or four years after that, Schering-Plough could be the favorite. Because of the twenty-year time horizon and the overall excellence of these four companies, one could pick a name out of a hat and, I believe, not be disappointed twenty years from now. Of course, there is nothing wrong with that and the analysis already performed. There is always something to learn. It's just that the healthcare industry has a long list of strong companies to choose from. I don't think we will see that in the remaining industries (except maybe financial), where the analysis may lead to a more obvious choice.

More to follow tomorrow. If you have thoughts, please share them with everyone -- send them along. I haven't counted the votes yet (just for kicks) but it's very close between PFE and JNJ, with SGP third.

Fool on!