Drip Portfolio Report
Friday, October 3, 1997
by Jeff Fischer (TMF Jeff@aol.com)
ALEXANDRIA, VA (Oct. 3, 1997) -- Today we have more letters from Foolish readers regarding PFIZER (NYSE: PFE) and JOHNSON & JOHNSON (NYSE: JNJ), ABBOTT LABORATORIES (NYSE: ABT) and SCHERING-PLOUGH (NYSE: SGP) Beginning Monday we'll wrap up with final thoughts. These letters provide excellent context and further analysis towards our conclusion. Enjoy!
1. If I had to pick one of the four stocks discussed, I would definitely pick Pfizer. Their drug, Lipitor, is co-promoted by the manufacturer, Warner-Lambert (a stock I happen to own) and is taking market share away from Zocor and Mevacor of Merck. Pfizer appears to be very aggressive on the R&D and has many new products on the way. Zithromax is a very convenient 5 day broad spectrum antibiotic which is well tolerated although I seem to prescribe Abbott's Biaxin more often for some reason. Pfizer's Viagra impotence drug is intriguing and if it works, will be a money making machine. Aricept only treats the symptoms of Alzheimers and doesn't slow the progression. Even so, the Medical Letter questions the efficacy of Aricept. Their pharmaceutical reps do a good job in inundating physicians with frequent visits by different reps to hammer in the image of their drugs. All in all, Pfizer is an excellent choice for the future regardless of today's valuations. Another company with exciting product prospects is Eli Lilly.
2. I am a pharmaceutical rep that competes against all four of the companies mentioned.
Pfizer is really killing us out there on many fronts. Zoloft actually has a chance to pass Prozac as the top antidepressant. Lipitor is giving Merck's Zocor and BMY's Pravachol fits, actually surpassing those drugs in market share in the first year (this is unheard of). Zyrtec, an antihistamine, might actually threaten SGP's Claritin line, which would be particularly disastrous for Schering-Plough since Claritin is really the only viable drug in its arsenal. Norvasc is receiving formulary additions everywhere.
PFE is the obvious choice for the DRIP portfolio. Their pipeline is scary and they're certainly worth a premium. I am buying up as many shares of PFE as I can.
3. Both PFE and JNJ are great companies. However, over a 20-year time horizon, I prefer Johnson and Johnson. Both have strong pharmaceutical franchises; however, the diversification JNJ offers gives it an advantage. Given such a long time frame, any number of things can happen to adversely impact pharmaceuticals: Medicare reform, changes in patent laws, increased competition from overseas and generic companies, etc. By deriving almost 50% of its earnings from consumer and professional product sales, I believe JNJ will weather any downturns in drug stocks much better than Pfizer or Schering.
P.S. I do not like Schering over a five-year time horizon. A very large portion of Schering's sales are derived from Claritin, an antihistamine nearing patent expiration.
4. I think Pfizer will be the company to beat for the next decade. Pfizer's major product areas are drugs for cardiovascular disease and infectious diseases. Schering-Plough's major sales are in allergy drugs. With the aging of the baby-boomers, and the rise in antibiotic resistant infectious agents, Pfizer's products should really be in high demand.
One piece of info I have had some trouble obtaining is information on when patents expire at each company. I was able to find info that Pfizer has 7 relatively new products driving their pharmaceutical sales, with only one having a patent that expires before 2003. I also have read that Pfizer has 10 New Drug Applications pending approval, and 46 product candidates in late stage development (Phase III trials). Sounds like a winner to me.
5. Dear Fools, As a family physician in a county hospital, I offer my observations about trends in the health field. True, Pfizer is the leader in cardiovascular drugs, and given the aging baby boomers and the incidence of heart disease it makes sense that investing in cardiovascular drugs is the way to go. But the reality of health care economics is that nothing will be used on a wide scale unless it is proven to work. That is why of the 50-70 cardiovascular drugs on the market, I only know 10-15 because they are either the cheapest or most effective. Even though Pzifer may have 10 cardiovascular drugs in the pipeline, they may not be used if mortality studies, studies that often take up to 20 years to complete, do not support their effectiveness.
Now, take the area that SGP has the marketing niche, allergy and dermatology. These are things that people of all ages suffer from. The use of a new drug in allergy or dermatology is governed by more immediate trial and error, simply by whether or not the patient feels subjectively it has worked. A much quicker turn around time. That is why I find myself writing prescriptions for Claratin, with a much higher incidence then Atenolol. I am much more likely to prescribe something new and flashy for a mere rash or an allergy, since there is no danger I will potential kill the patient, then prescribing something new and unproven for cardiovascular disease, when there is so much old stuff that has the backing of 20 years of mortality studies.
However, the real trend of the future is in antibacterials, and I will gladly invest in the company that places the biggest portion of R&D there. There have been doomsday predictions for the past 5-10 years that our current generation of antibiotics are not equipped to handle the superbugs that are being selectively bred by physicians wantonly prescribing antibiotics. In Japan, where they prescribe antibiotics for anyone who has a mere fever, there is a high incidence of a strain of bacteria know as VRE (Vancomycin Resistant Enterococcus), which is resistant to the strongest antiobiotic we have to offer. Find the drug company whose R&D department is finding a cure for that, and you will have the winner.
No flashy business analysis or valuation logic, just commenting on the industry from the prescriber/consumer end in the Peter Lynch fashion. I for one, favor SGP. It's margins are the highest, it's five-year appreciation is greater than Pfizer (although they have ran neck and neck in the past five years) and I believe its smaller size coupled with an aggressive management, means more room for growth. I am betting on SGP in the twenty-year timeline. Sincerely, Dorothy
6. One of the things that has been overlooked here is the current and future financial impact of alternative medicine on these healthcare companies. Personally, for every initial physician diagnosis, I will research and try alternative therapies rather than fill out a prescription, unless, of course the situation is life-threatening. I have a feeling that there are alot of people out there that do the same thing. Most of the time, the alternative therapy works better and there are no undesirable side effects. Once people start to take responsibility for their health through lifestyle choices, many of these prescription drugs will not be needed. I do think this will take a while, but we are looking out 20 years. My bet is with Johnson & Johnson for its diversity and balance sheet.
7. PFE does appear to be in the best position, however JNJ continues to amaze me for a company of it's size and diversity. JNJ should profit immensely from all the seed capital they have planted. During 1996 JNJ entered into 125 3rd party transactions or alliances involving licenses, equity investments, joint ventures, etc.... These companies are doing a lot of R&D that is not on JNJ's or its subsidiaries financial statements. For example, in 1996 JNJ invested $100M in 29 companies trying to develop new products for unmet needs. These developing companies typically have equity backing from other places such as IPO's or private backing, not just JNJ. In return for many of the equity investments JNJ usually gets exclusive worldwide rights to market their newly developed products through its sprawling distribution system. I would like to see JNJ in the DRIP Port based on valuation and diversity (though still pricey). I also feel there is some risk in PFE that is not discounted with regards to the government stepping in and regulating drug pricing.
Additionally, I believe that JNJ has upside if they are able to increase ROE and margins. More and more companies are beginning to shed margin dragging businesses and JNJ, though it has some well known brands, also is dragging some anchors (if you would call them that) and has periodically shed underperforming businesses.
8. Leaving numbers aside (blasphemy!), I just want to add that I used to temp at Pfizer, and I found employee morale there very high, and I was treated well there. I've worked a lot of places in my time, and have come to realize that these factors, while usually overlooked by the Wise, are good indicators of company quality for the Foolish.
9. Although I am normally a value investor, when considering DRIPs I am much less concerned with things like P/E ratios. I will only be buying a few shares during the first year I own any of these stocks, and the bulk of the buying that will yield long term growth will probably occur from 5 - 15 years from now, when today's valuations should have little significance anymore. Therefore, Pfizer's relatively high valuations do not concern me in this case.
10. My vote: JNJ.
1. World-wide brand name recognition. (The Coke of the drug world).
2. More actual dollars for research.
3. What would happen to its value (i.e., stock price) if it spun off the low margin consumer products!... or changed distribution methods... using Dell Computer techniques for production and Federal Express (cut out the middle people)!
4. I'm biased by the fact that we already own JNJ.
11. I am wondering why you are leaning toward Pfizer with managed care using formularies on HMO's. It is requiring patients to use the cheaper drug not the more expensive (latest drug marketed by the drug companies). This is especially true in the antibiotic type drugs. I would think that JNJ may offer more diversity and be better insulated from the managed care cost cutting.
12. As has been stated numerous times, all four stocks would enhance any portfolio. I have JNJ and ABT presently. I'm seriously considering adding PFE. In this field, my worries about being under-diversified are minimal. Rather than being overly competitive with each other, the four companies and their varied emphasis' appear to complement each other... All four choices appear to have healthy futures.
13. I have Pfizer and Schering now and will be adding Merck and Glaxo next month. With view to a 20-year investment I prefer to purchase several drip's from a group I am confident in. The only penalty is the $15 or $20 initial fee to Temper. After that I like to spread the exposure out. You do hot have to purchase more of every stock every month. In 20 years, what's the difference if you own 100 shares in 4 stocks or 400 shares of one stock. You have more control over your investment with more stocks, and tend to beenefit more from splits and mergers. I use this approach with every stock group in my drip portfolio.
14. I chose Schering-Plough. Margins and return on investment are the best. This is an indication to me that the management of this company is doing the best that it can with its resources and will do equally as well in the future with what it has to work with. It's call "good management." All of the other companies look great also, however, Schering is a standout.
15. I work with an EMT/EMS woman. She picks Pfizer hands down. Abbot on way out she thinks, and doesn't keep up with times. J&J just not in the correct things that REALLY make a difference. Schering just gets eliminated by her.
a. lipitor... dominant and growing...
b. diflucan... ditto... (just released over the counter in the uk, soon to be here as well)
c. zoloft... ditto...
d. zithromax... THE antibiotic for the coming two decades...
e. animal health products... #1 in the world... (and there are as many pigs, cows, sheep, etc. in the world as there are people) (my farmer friends tell me that if you raise pigs, you gotta give 'em respisure)
f. sales in 3rd world countries will soar in the next 20 years
g. most importantly... wheezie (mrs. harley) loves bain de soleil sun care products... (but I cant figure out how to pronounce the name of the stuff)
17. I favor Pfizer. My second choice, however would be Schering-Plough.
o Highest ROE [ABT second]
o Highest net margin [PFE & ABT second]
o Highest operating margin [PFE second] o Second highest proportion R&D [After PFE]
o Lowest debt o Lowest debt/sales [1.1%]
o Second highest cash/sales (11.7%) [after PFE (18.5%)]
18. If the decision to go with one of the four over the other happens to hang on a coin toss, let me offer this for everyone's consideration. ABT has a plant here in Austin, TX that I drive by on occasion. It's set back from the highway about 300 feet and is surrounded by unimproved property, basically prairie. There is a small herd of Texas Longhorn cattle that graze on the property and give all us Texans a nice warm feeling when we see them. So Abbott would be my choice as a tiebreaker, purely for esthetic reasons.
Yikes! Confused? If you start thinking too much, you'll begin to turn Wise and over-analyze. Probably it's best not to be swayed from your initial decision -- without good reason. As for the Drip Portfolio, we're going to tighten the scope to just the two companies (Pfizer and Johnson & Johnson) and to only a few factors beginning on Monday, and we should have a decision next week. Thanks for all the email. Unfortunately much of it couldn't run due to "space" constraints. Have a Foolish weekend, everyone...
[To continue healthcare and DRP stock discussion, head to the "DRP Possible Investments" message board.]
Day Month Year History Drip: +0.00% 0.00% 0.00% 0.00% S&P: +0.00% 0.00% 0.00% 0.00% NASDAQ: +0.00% 0.00% 0.00% 0.00% Rec'd # Security In At 9/8/97 1 Intel $94.69 Cash: $549.10 Total:$652.00 apprx.
The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is $150,000 by the year 2017, August.