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Why Professional Detailing's Future Sales Might Not Be What They Appear

Herb Greenberg

10/03/00 - 06:30 AM EDT

Remarkable story: On Monday, the stock of Professional Detailing (PDII - Cramer's Take - Stockpickr), a company you've probably never heard of (I know I hadn't) leaped by 40%, after already doubling in the past half year. That translated into a market-value boost of $313 million, bringing the grand total of its worth to $1 billion. One billion! And for what?

That's the remarkable part of this story. PDI, as the company calls itself, is a "contract sales" company, which means it markets drugs to doctors in the same way as manufacturers reps do. Its growth in the past half of the year has been impressive, as a number of programs to snare new business and expand existing contracts with drug companies have kicked in. Then came yesterday's announcement that the company had struck an agreement to distribute the tablet and oral suspension forms of Ceftin, an antibiotic made by GlaxoWellcome (GLX - Cramer's Take - Stockpickr). This is a product, mind you, that PDI has been selling since 1997.

Now, to hear the company's spin on the story, which is being regurgitated by analysts, with the addition of Ceftin its own sales will rise by $350 million next year; that's equal to the amount of Ceftin sold last year. Not bad for a company whose sales in the last 12 months were just $250 million. Not bad, that is, until you take a closer look.

First, Glaxo's general patent on Ceftin expired last month, though its patent for Ceftin tablets continues for two more years; that opens the door for competitors to start poaching on the drug with generics while PDI's contract is in force. Second, and more important, is the sales trend for Ceftin. After doing $350 million in sales last year, Ceftin's sales this year have been falling (according to monthly sales data tracked by IMS). Merrill Lynch goes so far as to forecast Ceftin's sales will fall to $272 million next year and $173 million by 2004.

So, with Ceftin sales expected to fall, where does the company come up with $350 million in sales next year? PDI officials didn't return my call, but apparently it has been telling analysts that it expects to increase Ceftin sales. Still, that doesn't explain how the company expects its own revenue to increase to $350 million.

Is the company having analysts include the Ceftin sales as part of its own sales, even though most of the money goes back to Glaxo, the manufacturer? If so, isn't that like analysts valuing priceline.com (PCLN - Cramer's Take - Stockpickr) on the total value of the products it sells, not the commission on selling those products (Seen priceline, lately?)?

Again, PDI officials couldn't be reached, and the company didn't provide any details of its Glaxo contract in its press release or on its conference call with analysts. But it would appear it has certain thresholds to meet, above which it makes money, and below which it doesn't. Put another way, it's a win-win for Glaxo, and potentially high risk for PDI.

Ah, but that's not the story Wall Street wants to hear. It also doesn't want to hear that PDI, as of Monday, trades at 3.3 times sales while rivals Ventiv Health (VTIV - Cramer's Take - Stockpickr), with higher revenue, or Boron, LePore (BLPG - Cramer's Take - Stockpickr), with lower revenue, trade at a steep discount to their sales. And it doesn't want to hear that the company may lose (by analyst estimates) as much as 50 percent of its business from Pfizer (PFE - Cramer's Take - Stockpickr), its third-largest customer. It doesn't want to hear any of that (and quite a bit more) because if it did, it might not have reason to bid up the stock. Blinders work wonders until they don't.

P.S.: In the most recent issue of Fortune, I noted why insider selling doesn't always matter. In this case, with the stock rising on news of a contract to sell a drug whose sales are falling, if insiders start selling, maybe you should, too.

Short Positions

  • Big Blues: The ole Greenberg Effect helps IBM (IBM - Cramer's Take - Stockpickr); stock up 5 points after an item here questioned whether the company will make its quarter. (No other reason I could find.)

  • Attention, class: An item here Monday noted how the stock prices of several tech companies, including IBM, could fall if they were stuck with the same multiple afforded former star WorldCom (WCOM - Cramer's Take - Stockpickr). That said, the calculation didn't include the cash and/or debt of those companies.

    Intel (INTC - Cramer's Take - Stockpickr), Dell (DELL - Cramer's Take - Stockpickr), Apple (AAPL - Cramer's Take - Stockpickr) and Gateway (GTW - Cramer's Take - Stockpickr) have tons of cash and little or no debt, while IBM and WCOM have a mountain of debt ($29.2B and $21.3B, respectively)," says money manager Whitney Tilson, a RealMoney.com sometimes contributor who is long Intel, Dell and Gateway. "If you add the debt to IBM and WCOM's market caps ($207B and $85B) and subtract the cash from that of the other four (thereby calculating enterprise value to earnings, not price to earnings), you come up with materially different numbers, though I suppose the general point might still remain."

    Indeed it would, though we won't know for sure until the good professor who originally ran the numbers re-runs them with the important numbers.

  • Caterpillar calamity: Wish I had paid more attention to the money manager who alerted me a few weeks ago to the huge rise in receivables at Caterpillar (CAT - Cramer's Take - Stockpickr). Yes, it appears, they stuff channels with tractors and truck engines the same way they stuff channels with computers. Either way, the result is the same: Too much inventory at the dealer level, especially in a slowing economy, and sales don't go up. (But Cat's stock did yesterday on takeover rumors swirling through its group. Maybe that's what they mean by dead Cat bounce!)