Pfond of Pfizer

05/19/2006 12:00 am EST

Focus:

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

To rank stocks for expected future performance, Vahan Janjigian uses a sophisticated quantitative system. Those that pass his screen, and also show the lowest risk volatility, make it into his Conservative Growth Portfolio, such as Pfizer, added to his list on April 21.

"Pfizer (PFE NYSE) makes pharmaceuticals for humans and animals. Its Human Health segment (87.8% of Q1 revenues) is the largest pharmaceutical business in the world. Products include blockbuster drugs (i.e., those generating more than $1 billion in annual sales) such as Lipitor, a cholesterol lowering drug; Norvasc, a treatment for hypertension; Zoloft, an antidepressant; Celebrex, an arthritis pain reliever; Zithromax, an antibiotic; Viagra, a treatment for erectile dysfunction; Xalatan/Xalacom, a glaucoma medicine; and Zyrtec, an antihistamine.

"The Consumer Healthcare segment (7.1% of Q1 revenues) includes popular over-the-counter products such as Listerine, Nicorette, Benadryl, Sudafed, Rogaine, Zantac, Rolaids, Neosporin,Visine, Lubriderm, and Purell. The Animal Health segment (4% of Q1 revenues) develops and sells products for the prevention and treatment of diseases in livestock and pets. PFE also manufactures and sells empty soft-gelatin capsules and bulk pharmaceutical chemicals (1.1% of Q1 revenues).

"Zithromax lost patent protection last November and sales fell 69% from a year ago. Neurontin, Diflucan, and Accupril/Accuretic lost exclusivity in 2004 and also saw lower sales. Zoloft, the most prescribed antidepressant in the US, will lose exclusivity at the end of Q2. Patents for Norvasc and Zyrtec will expire in 2007. Sales of Lipitor, however, continue to grow. Despite competition from Crestor, Pravachol, and Zocor, Q1 Lipitor sales were up 3% on a constant-dollar basis.

"Celebrex, initially hurt by Merck’s withdrawal of Vioxx from the market, is coming back strong. Celebrex sales were up 19% in Q1 compared to a year ago. Lyrica, an anti-epileptic medication, is projected to achieve full year revenues of over $900 million. Cost cuts totaled about $500 million in Q1 and should exceed $2 billion for the full year and rise to $4 billion per year by 2008. However, total Q1 revenues declined 3% to $12.66 billion. Human Health segment revenues fell 4% due to expiring patents, Bextra’s withdrawal, and unfavorable foreign exchange.

"The Consumer Healthcare segment saw a 5% decline. Animal Health segment revenues grew 3%. Thanks to greater efficiencies, pro forma operating margins expanded to 35.24%, up 4.68 percentage points from a year ago. Pro forma Q1 net income climbed 11.5% to $4.46 billion or 61 cents per share. GAAP net income was $4.11 billion or 56 cents per share, which compares to only $301 million or four cents per share last year due to charges relating to Bextra’s withdrawal.

"Recent FDA approvals include Exubera, an inhaled insulin for adults suffering with diabetes; Sutent, a treatment for patients with gastrointestinal stromal tumors, stomach cancer, and kidney cancer; and Eraxis, a treatment for a rare bloodstream infection. PFE also anticipates FDA approval for Champix, an antismoking treatment; Zeven, an antibiotic; and Indiplon, an insomnia treatment.

"As for corporate actions, management is considering spinning off or selling the Consumer Healthcare segment. PFE also bought back $1 billion worth of stock in Q1 and plans to repurchase another $1 billion worth in Q2 and $4 billion worth by year-end. PFE increased its dividend for the 39th consecutive year to an annual rate of 96 cents per share. Such actions could help boost total returns from this stock in coming periods."

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