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Chronic pain is a way of life for a great many Americans today. Whether it's in their backs, joints, heads or extremities, up to 10% of U.S. adults suffer pain that flares up frequently.
A third of all these chronic sufferers describe their pain as being "the worst one can possibly imagine," according to a finding of an advocacy group called the American Pain Society. And the majority of all sufferers have lived with pain that hits them at least six days per week and has done so for at least five years.
It is these people that major pharmaceutical makers
have tried to help by spending billions of dollars in research to develop anti-inflammatory drugs. And it is these people whose lives have been upended by the government's recent battle against a class of medicines called Cox-2 inhibitors and non-steroidal anti-inflammatories, or NSAIDs. Medicines that go by the prescription names Celebrex, Vioxx and Bextra, or the over-the-counter name Aleve, have given pain sufferers new leases on normal lives.
Down 35% in Five Years
Federal drug bureaucrats approved these drugs at one time, helping Pfizer and Merck put up the sort of revenue and earnings growth that cheered investors. Yet as physicians came to believe that their trust in the clinical studies backing the drugs may have been misplaced, and heart-attack concerns emerged to dampen enthusiasm, investors dumped their one-time heroes. Pfizer shares are off 35% in the past five years, while Merck is off almost 60% since 2001. Both companies have lost a quarter of their value since 2004 alone.
Does this make any sense, or have investors' fears pushed shares down too far?
In my view, the record is clear: Pfizer is one of the greatest companies on the face of the earth. And executives' announcement last week that they plan to cut expenses by $4 billion annually through 2008, buy back tens of thousands of shares, boost the dividend and roll out more blockbuster drugs should only have augmented its standing.
The stock rallied on the news, but there should be much more to come -- at least 20% over the next year and 100% over the next five. The time to buy is now, perhaps in small doses at first -- as there could be more downside to come if the broad market slumps -- and then more later. No pain, no gain.
After all, let's stand back and get something straight. Pfizer does not make cheeseburgers, sell insurance, hawk discount clothing or manufacture missiles. It does not strip-mine the earth for fossil fuels or pollute the skies, depend on the Internet or create anything that needs to be plugged into a wall. It is not propped up with financial derivatives or off-balance-sheet accounting or price-gouging. It is just a powerhouse competitor for the most brilliant but practical scientific ideas generated every day at biotechs, universities and its own facilities, and it does well by doing good. It is not too naive or soft-headed to observe, quite simply, that all its 115,000 worldwide employees try to do every day is help people prevent and recover from illness -- and live longer with less pain and discouragement.
One of the Good Guys
The company may have its faults: overzealous promotion, overeager pricing or overambitious research. And it may pay its chief executive too much. But at the end of the day, it is pushing the bounds of knowledge in a way that is supposed to be rewarded under the rules of our capitalist system.
That is to say, if its effort to peel back the layers of mystery surrounding sickness and the human genome makes it a few bucks, that's supposed to be a good thing. And if it happens to make a whole lot of money in the process, earning an outsized reward for its outsized risk-taking, then more's the better.
In investing, we are supposed to buy stocks when they are cheap and hated, so long as there is some "margin of safety" in the purchase. The concept of safety has taken many forms over the years in various situations, but it's not really such an obscure concept when it comes to the big U.S. drugmakers.
Pfizer has an absolute fortress of a balance sheet -- $7.3 billion in long-term debt compared with $63.8 billion in equity. It generated $16 billion in cash flow last year alone. It could be sued by every lawyer in America, lose the right to market a handful of key drugs and get sued some more. But Pfizer will still live to fight another day, because it has the financial resources, emotional smarts and political savvy to battle and win. And because, more importantly, it is probably in the right.
"It is a high-grade, ethical research company that does not play shenanigans," said Thomas Kahn, a veteran New York-based value investor who early in his career helped Benjamin Graham with his research. He has also owned Pfizer shares for more than two decades.
"You do not need to do wrong in America to be sued; you just need to have deep pockets. And if it is somehow forced to pay for some mistakes, it will not do so today or tomorrow but far down the road. With its balance sheet and earnings power, it could pay $20 billion over years and still not suffer."
Risks That Benefit All
Would the world not be a much less safe place were it not for the risks taken on by drugmakers? Ten years ago, a diagnosis of AIDS was a death sentence. Today, it is more akin to a chronic disease because of the kind of hard-nosed research that big drug firms pursue at great expense.
Fortunately, it's looking more like Pfizer will not be impeded. The clinical trials that have gotten the company in trouble over its anti-inflammatories may look bad on the surface. Dig down deeper, however, and it's hard to see whether the plaintiff's bar will be able to make charges stick. Prescribed dosage levels and individual patient histories will likely prove to be roadblocks to patients trying to pin their heart conditions on Celebrex.
Once the cloud of suits lifts, investors will renew their focus on Pfizer's terrific drug portfolio and a dominating sales force of more than 15,000. The company makes 10 drugs with annual sales of more than $1 billion, with the leader being a cholesterol-slashing statin called Lipitor, which is on track to generate $10 billion this year. It also makes Zoloft to assist depression patients and Viagra for sufferers of erectile dysfunction. According to Media General figures, it respectively pulls in 90% and 22% gross and net margins, a return on equity of 17% and return on capital of 15%.
In a business where it can take up to a decade to develop a new drug, these are the kinds of results that generate the confidence to try again, even as past successes go off patent. An R&D budget upward of $8 billion says it will probably figure out the next big puzzles or buy the companies that do.
If you purchase the stock today, it might go down a few bucks. It might even go down another $10, though I doubt it. But over time, Pfizer's strength and character will attract risk capital again. And with the benefit of a decent dividend, buybacks and low price/earnings multiple (its P/E for 2005 is 13.2), Pfizer will almost certainly reward patient investors with a double by 2011. "If they wrote returns like that in marble, the price wouldn't be where it is today," said Kahn.
To buy Pfizer today, in short, you need a strong contrarian bent and the kind of patience that 90% of investors don't seem to be able to muster these days. But as a doctor might say, take a couple of hundred shares and call me in a decade.
At the time of publication, Jon Markman held no positions in stocks mentioned in this column.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at firstname.lastname@example.org; put COMMENT in the subject line.