<THE RULE MAKER PORTFOLIO>

Warner-Lambert

by Matt Richey (TMF Verve)

ALEXANDRIA, VA (May 26, 1999) -- Day three of pharmaceutical week in Rule- Maker land brings us to one of the fastest growing companies in the industry -- Warner-Lambert (NYSE: WLA). Even if you've never heard of the company, you're probably quite familiar with its well-stocked portfolio of consumer brands. Listerine, Benadryl, Sudafed, Rolaids, Neosporin, Schick razors, Halls cough drops, Certs, and Bubblicious are just a sampling of the company's consumer health care and confectionery products. But while these products operate in a profitable and well-protected niche, they don't offer the profit and growth potential of the company's Parke-Davis pharmaceutical division.

After several years of meager growth, this diversified consumer products and health care concern began growing rapidly in 1997 with the introduction of Lipitor, a cholesterol-lowering blockbuster. In addition to Lipitor and other in-house developments, Warner-Lambert bolstered its pipeline with the recent acquisition of cancer and viral disease specialist Agouron Pharmaceuticals. Sort of like Johnson & Johnson (NYSE: JNJ), Warner-Lambert's business is driven by high-growth pharmaceuticals, while the modest-growth consumer staples act as a stabilizing cash-cow. Let's take a look at the company's first quarter financial results to see how this interesting mix of businesses has performed of late. Here are links to the company's Q1 press release and 10-Q.

A quick glance at the income statement confirms that business has been booming. Sales grew by 29%, and net income grew even faster at 37%. Digging a little deeper, I see that both gross and net margins have been expanding, too. The high-margin pharmaceutical division led the way with 48% growth in sales, which was over half of the company's overall revenue and over 70% of operating income.

Meanwhile, the consumer health care division didn't fare too badly either, turning in a respectable 13% sales growth. The confectionery division was the laggard, gaining only 4% in sales. Overall , gross margins of 76% and net margins of 13% are very good, but more-focused pharmas such as Pfizer and Schering-Plough do better. Nevertheless, Warner-Lambert is showing excellent direction on these metrics.

Taking a closer look at the pharmaceutical division, Lipitor led the way with sales of $751 million -- over one-quarter of total sales. Co-marketed by Pfizer, Lipitor is the most prescribed cholesterol-fighter in the U.S., where it holds a 40% share of new prescriptions. The company anticipates eventual annual sales of $10 billion or more for this drug alone. To increase Lipitor's market share, the company is engaging in life-cycle management programs that aim to identify new potential uses and patient populations.

Moving on to the balance sheet, the good news continues. The company turned its profit growth into cold, hard cash, while at the same time trimming both short- and long-term debt. The ratio of cash-to-debt more than doubled, but at 0.79, is still short of our standard of 1.50. Working capital management was excellent as evidenced by the declining Flow ratio, which now sits at a very good 1.0.

All in all, Warner-Lambert's business is humming along quite nicely with all important financial metrics headed in the right direction. Out of 21 hard-to-get financial direction points on our Rule Maker Ranker (a free spreadsheet analysis tool, linked at bottom), Warner-Lambert achieved an impressive 19 points. And when compared to peers Pfizer, Schering-Plough, and Johnson & Johnson, the company edged its way into the second-tier of Rule Makers with a score of 40 points (see analysis).

Looking to the future, Warner-Lambert's in-house pipeline offers tremendous potential. The following pharmaceuticals are in advanced development:


Thereapeutic Area  Compound       Potential Use      
Arthritis/         CI-1004/Dual   Inflammatory
  Inflammation     Inhibitor      diseases           
Cardiovascular     Avasimibe      Coronary Disease   
Central                           Epilepsy and
  Nervous System   Pregablin      Anxiety Disorder   
Central
   Nervous System  Igmesine       Depression         
Chemotherapy       Clinafloxacin  Bacterial Infection
Diabetes           Zenarestat     Diabetic pain      

Perhaps even more exciting than the company's in-house pipeline is the portfolio of potential compounds gained in the $2.1 billion acquisition of Agouron Pharmaceuticals, which closed on May 17. Agouron specializes in the treatment of cancer, viral diseases, and diseases of the eye. In addition, Agouron makes Viracept, the country's leading treatment for HIV infection and AIDS. Combined with Warner-Lambert, Agouron gains global reach as it begins to commercialize its products. Warner-Lambert will benefit from Agouron's library of more than 400,000 compounds. Most importantly, Agouron provides its unique structure-based drug design based upon the structure of proteins that play key roles in human diseases such as cancer and AIDS.

With the inclusion of Agouron, Warner-Lambert has 46 new chemical compounds and 55 distinct clinical projects underway to fuel future growth. As the company continues to focus more heavily on pharmaceuticals, gross and net margins should edge higher, positioning the company as a potential first-tier Rule Maker. This is definitely one to watch.

Matt

05/26/99 Close

Stock Change    Bid
AXP   +5 1/16   119.56
CHV   +3 1/16    94.06
CSCO  +4 3/4    109.13
EK    -  5/16    70.19
GM    +  1/4     84.88
GPS   +  9/16    60.63
INTC  -1 3/16    51.69
KO    +1 1/4     68.50
MSFT  +2 1/4     78.50
PFE   -1 1/4    101.00
SGP   -  1/8     44.44
TROW  +1 7/16    37.31
XON   +1 3/4     81.94
YHOO  +13 15/16 140.88

                  Day     Month  Year    History
        R-MAKER  +2.34%  -7.47%   3.72%  31.24%
        S&P:     +1.59%  -2.28%   6.46%  31.72%
        NASDAQ:  +1.94%  -4.55%  10.69%  46.84%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     78.50   100.59%
   6/23/98   34 Cisco Syst    58.41    109.13    86.82%
    5/1/98   55 Gap Inc.      34.37     60.63    76.39%
    2/3/98   22 Pfizer        82.30    101.00    22.72%
   2/13/98   44 Intel         42.34     51.69    22.09%
   5/26/98   18 AmExpress    104.07    119.56    14.89%
   2/17/99   16 Yahoo Inc.   126.31    140.88    11.53%
    2/6/98   56 T. Rowe Pr    33.67     37.31    10.81%
   2/27/98   27 Coca-Cola     69.11     68.50    -0.88%
   8/21/98   44 Schering-P    47.99     44.44    -7.41%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     81.94    27.36%
   3/12/98   17 General Mo    72.41     84.88    17.22%
   3/12/98   15 Chevron       83.34     94.06    12.86%
   3/12/98   20 Eastman Ko    63.15     70.19    11.15%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   48 Microsoft   1878.45   3768.00  $1889.55
   6/23/98   34 Cisco Syst  1985.95   3710.25  $1724.30
    5/1/98   55 Gap Inc.    1890.33   3334.38  $1444.05
   2/13/98   44 Intel       1862.83   2274.25   $411.42
    2/3/98   22 Pfizer      1810.58   2222.00   $411.42
   5/26/98   18 AmExpress   1873.20   2152.13   $278.93
   2/17/99   16 Yahoo Inc.  2020.95   2254.00   $233.05
    2/6/98   56 T. Rowe Pr  1885.70   2089.50   $203.80
   2/27/98   27 Coca-Cola   1865.89   1849.50   -$16.39
   8/21/98   44 Schering-P   2111.7   1955.25  -$156.45

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1638.75   $352.05
   3/12/98   17 General Mo  1230.89   1442.88   $211.99
   3/12/98   15 Chevron     1250.14   1410.94   $160.80
   3/12/98   20 Eastman Ko  1262.95   1403.75   $140.80

                              CASH     $70.09
                             TOTAL  $31575.65

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it adds $2,000 in cash (which is soon invested in stocks) every six months.

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