<THE DRIP PORTFOLIO>
Big Drugs for '99
Drugs are good. Or can be.

by Jeff Fischer (TMFJeff@aol.com)

Alexandria, VA (Jan. 13, 1999) -- The famous line in the film The Graduate should have been "pipeline" rather than "plastics." The future is in the pipeline. The drug pipeline, that is. At least when it comes to pharmaceutical companies.

We wrote about Johnson & Johnson's (NYSE: JNJ) pipeline on December 29. Today we'll discuss all of the potential major drugs in the pipelines of all of the various pharmaceutical firms that are developing them. (Before we start, if you're interested in the Intel (Nasdaq: INTC) conference call summary from yesterday, we now have it: just click here.)

Onto the drug biz!

Pharmaceuticals are such an attractive industry for the long-term investor that I believe (as explained in the Fool's Industry Focus 1999 book) that "overweighting" your investment in this industry is a good idea. There are very few industries with such strong margins and sustained long-term growth prospects due to science and the constant invention of new remedies for ever-present (and evolving) diseases.

As a matter of fact, I can't name any other industry with above 80% gross margins (for the leaders) and a long-term earnings growth rate of 16% annually. Plus, the pharmaceutical industry is currently experiencing its strongest period of growth for several external reasons, which we list as the Favorable Factors (as we explain again -- sorry -- in Industry Focus 1999). There are five factors that we consider. They are:

1) This is a must repeat purchase, high-margin business, 2) with favorable demographics as the population ages, 3) that is continually developing more cures (i.e., products) as science advances, 4) and is operating under a much more efficient FDA that is eager to get important drugs approved, and finally, 5) managed care providers are relying on pharmaceuticals for cost savings. That final point might sound counter-intuitive, but the reality is that drugs that keep anyone out of the hospital are extremely cost-efficient (compared to the alternative) for managed care providers.

In such a dynamic growth industry operating under very favorable conditions, you could throw a stone at a handful of industry leaders and hit a winning investment. For example, last year each stock in a basket of nine leading pharmaceutical stocks that we covered returned 55% on average. Despite this widespread success, in-depth research to learn which companies have strong potential drugs in the near pipeline is a very Foolish undertaking. So let's undertake it.

Pfizer hogged the headlines in '98 with its blockbuster release of Viagra, a drug that is quickly becoming a blockbuster seller (meaning, $1 billion in sales or more). Even though Viagra was widely known as long ago as the summer of '97, Pfizer's stock rocketed last year on the successful release of the compound, and it will likely continue to be strong this year, too. Looking at 1999, will any companies have similar success with new drugs?

There are actually several promising drugs on the pharmaceutical horizon for this year. Below is a list of drugs expected to hit the market in 1999, alongside the company (or companies) developing them, what the drugs treat, and the potential sales that each could achieve in the year 2002.


                                                  Potential
Company            Drug/Condition                 2002 Sales
Monsanto/Pfizer    Celebrex/arthritis             $3 billion  
Merck              Vioxx/arthritis                $2 billion
J&J                Aciphex/ulcer                  $800 mill.
Smithkline         Lymerix/diabetes               $755 m 
AHP                Rapamune/transplant rejection  $750 m
SGP/Zonagen        Vasomax/erectile dys.          $505 m
Pfizer             Replax/migraine                $450 m 
BMY                Tequin/antibiotic              $450 m
Glaxo Wellcome     Ziagen/HIV                     $450 m
AHP                Protonix/ulcer                 $400 m

(Information compiled from Cowen & Co.)

Monsanto is expected to be the first to market its new drug for arthritis, Celebrex, which it is co-marketing with Pfizer. The market size is enormous and sales could reach $3 billion by 2002. Merck is on Monsanto's heels with its Vioxx drug for arthritis, but being second to the market its sales might only reach $2 billion in 2002 -- still not small potatoes. The next largest potential drug that is close-to-market is that of our own J&J. The drug is Aciphex for ulcers, and it could reach $800 million (or more) in sales in three years.

The list continues, from a drug for diabetes from Smithkline Beecham, to a new drug for HIV from Glaxo Wellcome. Notable about this year's list is that it doesn't hold any (but for one older drug) "lifestyle drugs," or drugs that are meant to improve a person's lifestyle by remedying situations that don't necessarily harm one's health, such as male pattern baldness, for example. Lifestyle drugs will continue to be enormous sellers, of course, but after last year's surge of new entrants perhaps it'll be another year before we see more blockbusters in this arena.

No matter. All of the drugs expected to launch this year are very important.

As exciting as new drugs are -- and they're admittedly more exciting when they're about to hit the market! -- remember that Fools invest for the long term. Don't buy Pfizer or Merck this year merely because you hope that the companies' new drugs for arthritis will be approved with a splash. However, do always know what is in the pipeline for your favorite pharmaceutical or biotech company (or for ANY company that you invest in, for that matter! The future is always represented by the "pipeline" that constitutes a company's future products and offerings.)

To talk about pharmaceutical companies and their pipelines, visit each firm's respective message board on the Fool. The leading companies have a large following here and there are usually many fellow Fools who are willing to recite pipelines and the potential behind each drug company for you. (By the way, the Rule Maker Portfolio is overweighted in pharmaceuticals, owning both Schering-Plough and Pfizer.)

Until tomorrow (when we return to oil and gas), Fool on!

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