Pfizer's Phat Quarter Leaves Thin Soup for Investors

The company's earnings report raises a crucial question: Is the drug business suddenly less profitable?
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Pfizer

(PFE) - Get Report

turned in a classic Pfizer performance Thursday.

The drug company, which may be the best managed in the industry, dumped its first-quarter earnings into investors' laps during market hours, as it always does. It never says specifically what day it will report. It doesn't hold a conference call. And, as the Street is remembering, it doesn't care about those somewhat arbitrary quarterly and yearly pennies-per-share numbers.

In short, Pfizer doesn't care about Wall Street. Wall Street has always known this, but because of its own insecurities and perversities, the ardor for Pfizer has grown. Any company with the audacity to spurn the Street must be worth buying.

At least until the company had an unsustainable valuation. It didn't help that there was a mammoth rotation out of growth stocks and into value stocks, out of noncyclicals and into cyclicals. That rotation started Wednesday and accelerated dramatically Thursday.

Yes, the company made the 62 cents a share the Street was looking for, up from 53 cents a year earlier, a 17% gain. Yes, net income rose to $815 million from $692 million in the earlier period, a rise of 18%. Yes, total revenue of this monster rose to $3.93 billion, up 29%.

But the stock got hammered like a Sudanese pharmaceutical plant. Pfizer closed down 14 5/8, or 10%, to 130, after trading as low as 127 7/8 Thursday.

"I shouldn't be surprised" that Pfizer doesn't manage its earnings, says one New York health care money manager who was long Pfizer as of the end of last year. "The sales are better than expected, but they didn't show a penny upside in earnings. Instead, they just ramped up spending. I kick myself for being so stupid and thinking they'd be different, because historically this has been their position. I just thought this being their 150th anniversary, they might actually want to show some upside somewhere along the line."

Now

investors realize that the company had a price-to-earnings hovering around 60 before today. Given the comparison to last year's, second-quarter growth won't be great this year. The company said it will only have single-digit growth in the second quarter over last year's quarter. (The problem is this second quarter has to compare with last year's, in which luv-drug

Viagra

was launched to what was then the greatest first quarter ever for a nostrum.)

Worse, Pfizer essentially guided the 1999 consensus down, declaring an EPS range for this year of $2.40 to $2.50 when First Call reported a consensus of $2.49. Even if the consensus falls to $2.45, however, the stock would still be trading at around 53 times earnings. Historically, the drug group has traded at twice its growth rate at its highs. That would put Pfizer at 44 times 1999 EPS, or around 108. And lawdy, Merck is trading at 31 times, while the

S&P 500

is around 29 times. Certainly Merck has some issues it needs to sort out, but is Pfizer worth two-thirds more than the No. 1 U.S. drug company?

All this isn't to say that Pfizer didn't have an incredible quarter. Sales of

Norvasc

, an antihypertensive launched way back in 1990, leaped 24% to $703 million from a year ago. Happy-pill

Zoloft

wafted up 14% to $527 million, despite new competition from

Celexa

, from

Forest Laboratories

(FRX)

and

Warner-Lambert

(WLA)

.

Zyrtec

, an anti-allergy therapy, rose 54% to $126 million. That's an amazing rise -- and a tribute to Pfizer's sales reps -- because it's a mildly

sedating

antihistamine that competes with

Schering-Plough's

(SGP)

nonsedating

Claritin

. P.T. Barnum, eat your heart out (and then take your Norvasc).

One major issue is Viagra. That drug is in trouble. Sales were down sequentially from the fourth quarter, to $193 million from $236 million in the fourth quarter. Foreign launches have largely happened, and sales are still going south. This will be lucky to be a $1 billion drug annually going forward, says one investor who has no position.

The question Wall Street is left with is how does a company that has such strong revenue growth and strong performers not make more money? A lot went to research and development, which soared 36% to $655 million from a year earlier. Selling, informational and administrative expenses skyrocketed 31% to $1.57 billion.

And that leaves lingering and scary questions: To keep up the kind of growth Pfizer has, will it cost more than it used to? To stay strong, will drug companies need to plow increasing amounts into research and sales?

Is the drug business suddenly less profitable?