Pfizer and other drug companies may need some of their own pills

INVESTING

June 20, 1999|By BILL ATKINSON

VIAGRA could use a little Viagra.

At least the company that makes the impotence drug, Pfizer Inc., could use a dose of its own medicine. For that matter, many of the big drug companies could also stand a pill or two.

These once white-hot drug stocks have cooled off, and some experts are staying away from them because, while their prices have swooned -- in some cases by 30 percent -- they have not fallen far enough.

"We still think they are over valued," said Steve TeSelle, a portfolio manager with Denver-based Meridian Investment Management Co., the adviser to nine Icon Sector funds. "We would wait further. What you are starting to see is that there are a few cracks in the armor, that the picture isn't as perfect as everybody hoped. Viagra sales are slowing and there is a little more competition than people had thought."

Pfizer, which has been one of the premier growth companies of the late 1990s, has seen its stock price slip to $100 a share, down 33.4 percent from its April 12 high of $150.12. That's the good news. Its stock was down 43 percent Oct. 8 when it plunged to a 12-month low of $86 a share.

Shares of Merck & Co., the maker of Propecia, a treatment for male hair loss, are down 20 percent from their March 19 high of $87.375; Schering-Plough Corp. is down 24 percent from an April high of $60.1875; and Eli Lilly and Co. has fallen 29 percent from its high March 5 of $97.75.

Shares in drug companies were selling at premium prices until springtime when politicians on Capitol Hill decided to tackle the problem of escalating health care costs. The drugmakers were squarely in their sights.

They introduced legislation to cut the cost of drugs for people receiving Medicare, the government program that guarantees health care. Democrats argued that the federal Health Care Financing Administration, which oversees Medicare, could force the drug companies to give Medicare recipients large discounts on their medication.

Investors were shaken by the talk. At the same time, shares of paper, oil and mining companies -- long forgotten by investors -- suddenly became popular amid talk that a recovery in Asia was fueling rising prices for their products. Investors flocked to these stocks, and the drug companies sputtered.

TeSelle, who buys stocks that are relatively inexpensive, have a favorable long-term growth rate and a rising stock price, says the big drugmakers are still too expensive.

Pfizer, for instance, still trades at a lofty price-to-earnings ratio -- its share price divided by earnings per share -- of 47 percent, and Merck's PE ratio is 31 percent.

Last year, Icon Healthcare Fund owned all of the big drugmakers, which made up 25 percent to 30 percent of its holdings. But its computer model told the managers that it was time to move into something else. "The valuations just got so high we had to sell them," TeSelle said.

On the other hand, Joseph V. Battipaglia of New York-based Gruntal & Co. says these stocks are relatively inexpensive from where they have been. Gruntal has rated Pfizer, Bristol-Myers Squibb, Johnson & Johnson, Merck and Schering Plough "strong buy."

Indeed, the group has performed well in past years. The average return for a group of eight large drug companies was 53 percent last year, 38.2 percent over the last five years and 27.9 percent over 10 years.

"They have consistent earnings, they have the ability to innovate fairly quickly, and the FDA [Food and Drug Administration] has accelerated their approval times," Battipaglia says.

Battipaglia expects their prices to come back with solid second-quarter financials. Investors, he said, will "bid these prices back up."

The reason: The big drug companies have "all of these business opportunities," that range from developing drugs to fight hepatitis and cancer to drugs that retard aging.

"I would not want to bet against the pharmaceutical stocks," he said. "The complexion of these companies can change rather quickly."

Pub Date: 6/20/99

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