Pfizer - zu Unrecht im Keller

Celebrex has also been hurt by one of its own large clinical trials, detailed last December, in which it more than doubled the risk of heart attack among patients taking it to prevent polyps that can cause colon cancer.

McKinnell defended the drug's safety, however, saying heart risks were not seen in dozens of other Celebrex trials.

Company sales have also been hurt by generic competition for its Diflucan anti-fungal drug, epilepsy treatment Neurontin and Accupril for high blood pressure. Pfizer lost U.S. patent protection only days ago on antibiotic Zithromax and patents will lapse over the next two years on its depression drug Zoloft, hypertension drug Norvasc and Zytrec for allergies.

McKinnell declined to say when he will give new earnings forecasts for 2006 and 2007. But he said higher profit growth will hinge largely on rebounding sales of Celebrex and impotence drug Viagra, as well as a return to accustomed high sales growth for cholesterol fighter Lipitor.

Viagra should be helped, he said, by a return of direct-to-consumer ads that stopped late last year. He said the new ads will appear soon, with "a different look and different feels" than prior ads.

Lipitor should get a boost from new clinical trial data showing the drug's ability to reduce heart attacks and strokes among diabetics, McKinnell said.

McKinnell said Pfizer is counting on a number of experimental drugs to help drive profit growth in coming years, including Torcetrapib, which greatly raises the body's level of heart-protective HDL cholesterol. It is being tested in combination with Lipitor, which cuts levels of artery-clogging LDL cholesterol.

"It looks like a combination of raising HDL and lowering LDL cholesterol could have dramatic impact, maybe eliminating cardiovascular risk," McKinnell said. He described the combo pill as potentially one of the most important new heart medicines in decades.

McKinnell said Pfizer intends to seek marketing approval soon for Varenicline, a smoking-cessation drug he predicts will far outstrip GlaxoSmithKline Plc's  Zyban in effectiveness.

"Our drug looks like it can take the quit rate up to 50 percent," McKinnell said, meaning that the percentage of smokers managed to quit smoking and stay off cigarettes a year after beginning the therapy.

McKinnell said Pfizer aims to continue buying drugs from other companies, but will not be greatly helped in doing so by an estimated $37 billion in overseas profits it is repatriating this year.

McKinnell, who is slated to retire in 2008, said he is committed to leading Pfizer through a very difficult period. The company's stock has fallen by more than 50 percent since Pfizer's merger in 2000 with Warner-Lambert Corp.

"I personally think I should complete my next couple of years. The board has agreed with that. If they change their views -- then I certainly would leave early," McKinnell said.

"You know I've been working for 35 years ... retirement is looking pretty good," he said.

The stock tumbled to an eight-year low and industry analysts were shaken when Pfizer yanked the profit forecasts last month. One analyst in a conference call that day told McKinnell there was a "crisis of confidence" in the company. He rebuffed the assertion.

"My goal was to hand over the company to my successor in better shape than I received it. You can't say that today. We've got to get through this period of patent expirations," he said.

McKinnell, the 12th chairman of the 156 year-old drugmaker, said future profit will also be hurt as more of the company's drugs face competition from generics, noting the medicines at risk now have annual combined sales of $14 billion.

"It's hard to swallow that lump," he said.

But McKinnell said Celebrex should eventually rebound and that a new epilepsy drug, Lyrica, is doing very well. And a handful of new drugs could soon win U.S. approvals, he said.

Pfizer has said it expects revenue to fall slightly this year, a marked change from stellar sales growth in recent years -- before Celebrex hit the skids and generic rivals were introduced.

"I think we certainly have a good basis for a return to growth," he added.  

The problem I see with American drug companies is that they have poor prospects for double-digit revenue growth. Pfizer (PFE:NYSE) has about $52 billion in revenue. Consensus for 2006 is no revenue growth. Will it be able to find $5 billion in new revenue for 2007? If it does, will it then be able to find $6 billion in 2008? I don't see how it can. If it can't, it's reasonable to believe the stock will idle, assuming no death-blow news to one of its drugs.

My expectations for price appreciation for the big domestic drug companies are very low. TIPS also have quite low chances for price appreciation (their par value inches up at the rate of inflation, and they pay an interest rate that is usually lower than that of regular bonds), so there's one thing they have in common.

The drug-stock-as-bond comments that I heard referred to individual stocks. Bondholders don't usually take on single-stock risk, so for me, a stock doesn't quite hold up as a bond substitute.

The drug sector ETFs might be a different story. Clearly, any product that reasonably diversifies its holdings won't have substantial single-stock risk.

A five-year TIPS yields about 1.8%. The Healthcare Select Sector SPDR (XLV:Amex) yields 1.2%. The Merrill Lynch Pharmaceutical HOLDRs Trust (PPH:Amex) yields 2.5%.

Hard Times in Pharmaceuticals

Merck (MRK:NYSE) and Pfizer have dropped significantly over the past few years; the Healthcare Select Sector SPDR and the Pharmaceutical HOLDRs Trust have held up better.

So the yields are in the same ballpark, and both TIPS and pharmaceuticals have limited upside.

What about the downside for health? This idea would make no sense if Pfizer and Merck (MRK:NYSE) plummet from here.

But here is an anecdote that may point to a bottom. When I first wrote about my Pfizer revenue theory a year and a half ago on another Web site, I received an incredible amount of hate email. When I repeated the idea in a Columnist Conversation post last week, I only got one email that mildly disagreed. This leads me to think the selling could be about done.

Three things might be enough to tie this theory together: similar yield, limited upside and limited downside.

If the broad market provides below-average returns for the next few years, as some contend, and if my thoughts about pharmaceuticals hold water, it might result in the pharmaceutical-centric ETFs averaging 2%-3% returns plus the dividend. That's not much different from what TIPS are likely to do.

But pharma ETFs offer something TIPS don't. Despite what anyone thinks about the fundamentals, the entire sector could rally significantly at any time for no reason at all. This has happened repeatedly throughout market history. Pharma-centric ETFs should participate to some degree in a broad market rally -- this can not be expected of TIPS.

This idea makes some sense if you believe that, after being cut in half or worse, domestic pharma stocks have now seen most of the selling.