Jubak's Journal Recent articles: • The oil sector's real winners , 5/25/2005 • The Fed is all wrong about inflation, 5/24/2005 • 5 growth stocks for a weak-kneed rally, 5/20/2005 More... | Jubak's Journal Catch Pfizer while it's on the mend The drug company still faces problems, but with a host of promising new cancer drugs in the pipeline, growth should pick up -- making this a feel-good story for patient investors. By Jim Jubak If you're a patient investor who can stomach some degree of uncertainty, I believe I have a stock for you: Pfizer By no means is the drug maker out of the woods. The risks certainly haven't gone away. But 2005 looks like the bottom for the company, and Wall Street is likely to start anticipating a 2006 recovery in revenue growth sometime this year. My recommendation is to buy it now and keep adding to it on any weakness over the next two quarters. Of course, youll need to make up your own mind, but let me spell out the pros and cons behind my recommendation. I know that the safety of the company's COX-2 inhibitors, Bextra and Celebrex, has dominated the headlines for the last year. Pfizer finally pulled Bextra off the market at the urging of the U.S. Food and Drug Administration, which held that the drug offered no unique health benefit to offset its potential for life-threatening skin reactions and an increased rate of heart attacks. Celebrex has been relabeled with what is called a "black box warning" about its potential risks.
And that attention is appropriate. Celebrex was one of the company's biggest selling drugs, and Bextra was one of its most promising recent discoveries. In 2004, Celebrex sales came to $3.4 billion, up 75% from 2003. Bextra racked up $1.2 billion in sales. Now Bextra sales have dropped to nothing and Celebrex sales are projected to fall by 40% or more in 2005. In the first quarter of 2005 combined sales of the two drugs fell 55%. U.S. sales for Celebrex fell 31%. Real problem was bigger But the problems with these two drugs -- as headline-worthy are they were -- were just one part of a true growth crisis at Pfizer. And it's that crisis that finally led me to sell Pfizer out of Jubak's Picks last June at a 9.6% loss (after dividends). I had been a very patient investor: I'd held the stock in the portfolio since August 2001. But I just couldn't see holding any longer. The growth had just stopped at Pfizer, and I didn't see how the company was going to get it started again. Related news and commentary on MSN Money That's because all of Pfizer's biggest sellers were under attack. Zoloft, the antidepressant that produced $3.4 billion in revenue for Pfizer in 2004, is due to come off patent in the United States in 2006. Zithromax, the company's best-selling antibiotic with sales of $1.8 billion in 2004, faces competition from generic versions in November 2005. Zyrtec, the company's best-selling allergy drug with $1.3 billion in 2004 sales, could lose patent protection in the United States in 2007. Viagra, the first erectile dysfunction drug, with $1.8 billion in 2004 sales, is losing share to Cialis and Levitra. And Lipitor, the Big Daddy, the heart of Pfizer's business with $10.9 billion in 2004 sales, is the subject of a lawsuit from Ranbaxy Pharmaceuticals, an aggressive maker of generic drugs that seeks to overturn Pfizer's patent. Even assuming Pfizer wins the Lipitor case, and I think it will, that's a lot of revenue to replace. Ball parking the bad news gave me a total of $6.1 billion in lost annual revenue: $1.3 billion from Bextra, $1.4 billion from Celebrex (40% of 2004 revenue), $1.7 billion (50% decline due to generics) from Zoloft, $1 billion (conservatively) from Zithromax and $700 million from Zyrtec. Of course, the total revenue picture is even worse because Pfizer doesn't merely need to come up with $6.1 billion in annual replacement revenue, but another $6 billion or so a year in growth revenue. Pfizer's sales growth over the last five years has averaged 11%. With annual sales of $53 billion in 2004, that amounts to adding $6 billion to revenue in 2005 to keep the record intact. It's that sales growth, plus very disciplined cost cutting, that powered Pfizer to average annual earnings increases of 20% over the last five years. The job of turning sales into earnings also looked like it was going to get harder for Pfizer as competition with generics lowered the company's margins. But given the magnitude of the company's revenue gap, I confess, falling margins didn't even make it onto my radar screen. Promising pipeline Now in early 2005, investors are starting to get the first glimmer of hope that Pfizer might be able to fill that gap. And the hope is coming from an unlikely source. Pfizer is known as a great acquirer of other drug companies, as a great marketer of drugs discovered by other companies, and as a great cost-cutter after acquisitions. But it doesn't have a reputation as a great drug discovery house. That's Merck But it looks like Pfizer's salvation will come out of its research and development pipeline. At the end of 2004 the company was working on 130 new molecular entities identified as possible drugs and 95 projects to find new uses for existing drugs. The company has committed itself to a punishing schedule of submitting one new drug application a quarter to the U.S. Food and Drug Administration through 2006 and initiating one new licensing deal or development alliance every two weeks. Swell, on paper, you say, and bravo to management for its commitment. But show me promising drugs now in clinical trials. That's what I wanted to see, too. And that's exactly the kind of evidence that's started to emerge in the last few months. A promising array of cancer drugs, acquired when Pfizer bought Pharmacia two years ago, has started to get the buzz on the oncology conference circuit. The two most promising drugs belong to the current wave of cancer therapies that starve tumors of their blood supplies. Sutent, a once-a-day pill, halted the growth of a rare stomach cancer in 385 patients who had developed resistance to Gleevec, the big new cancer drug from Novartis Another Pfizer drug candidate, AG13736, which the company acquired when it bought Warner-Lambert in 2000, reduced tumor size in 46% of patients with late-stage kidney cancer. Suddenly, Pfizer looks like a potential player in the exploding field of cancer drugs, probably the hottest area of drug development. The company's deal with Pharmacia gave Pfizer drugs for colorectal and breast cancer with sales that reached $900 million last year. And the company has a total of 13 cancer drug candidates now in clinical testing and five more about to enter trials. After the success that Genentech It won't happen tomorrow. Wall Street analysts are forecasting that earnings in each of the next three quarters of 2005 will fall below earnings for the same quarter of 2004. Earnings growth at Pfizer, according to their projections, won't resume until 2006 and even then growth will be just 9% from depressed 2005 levels and only enough to take earnings per share back to where they were in 2004. And those estimates have a major "if" to them. They depend on Pfizer winning its patent case on Lipitor and being able to milk its cholesterol franchise. Lipitor sales grew by 23% in the first quarter of 2005, and given the safety questions now dogging competitor Crestor from AstraZeneca If Pfizer loses its patent suit on Lipitor, all bets are off. I don't think that outcome is priced into the stock at all at this point. Given this set of pros and cons, I don't think investors should think of Pfizer as a blue-chip drug stock at all at the moment. Rather, think of it as a risky development-stage company with some very promising drugs in the pipeline -- a company that happens to be attached to a cash cow that can fund these drugs without having to raise outside capital that will dilute investors. And a company that happens to be attached to the world's greatest drug-marketing apparatus, so that if the drugs succeed the revenues won't have to be split with some marketing partner. Sure there's risk here -- Lipitor could go generic or the cancer drugs could prove a bust -- but finally I can see a reason to believe in an upside too. And investors aren't paying 90 times earnings (as with Genentech) for Pfizer, but a modest price-to-earnings ratio of 14.6 times projected 2005 earnings per share. That, I think, discounts the risk to attractive levels. I believe investors are getting this package of risk and reward at a very reasonable price. They aren't likely to get the reward overnight and maybe not even in 2005 at all. But with Pfizer I'm finally willing to say that patience might pay off. Changes to Jubaks Picks Buy Pfizer There's light at the end of the tunnel, finally, for Pfizer New developments on past columns 5 growth stocks for a weak-kneed rally I'm not sure I'd put much new money to work at this point in the current rally but it looks like it's worth staying in the game for a while longer. On May 26, the Commerce Department delivered the upward revision to first-quarter GDP that I wrote about in my May 17 column and that the market's rally anticipated. According to the revised figures, the economy grew by 3.5% in the first quarter of 2005 instead of the originally reported 3.1%. The slowdown in growth that everybody briefly worried about because of that initial report has turned out to be a statistical mirage to a great extent. The consensus among economists right now calls for 3.5% growth in the second quarter as well. The day before, investors got confirmation that large short positions have helped fuel this rally and are likely to keep the upward momentum going. Short interest on the NASDAQ Stock Market rose to a record, for the week that ended on May 13, with the number of short positions climbing equaling 3.3 days of average trading volume. That was up from 3.2 days at the last report in mid-April. This trend matches the report last week from the New York Stock Exchange that short interest climbed 1.54%. That was the fifth increase in a row. Short interest is a measure of how many shares of a stock or, in this case, of all stocks traded on an exchange or market have been sold short. The number is important in trying to gauge the potential strength of any rally because investors who are short a stock are betting on it to fall in price, and when the stock instead starts to move upward, short sellers often decide to buy shares to cover their short sales in order to limit their losses. That buying by short sellers provides important fuel for a rally. And when the short interest is high, as it is currently on the NYSE and Nasdaq, that means there's more fuel to keep a rally going. 4 stocks with real value in real estate On April 26, Rayonier Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Rayonier. He doesn't own short positions in any stock mentioned in this column. | ||||||||||||||||
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