Wyeth: Ready to Rebound
By Herman Saftlas
It's shaping up to be a tough year for the U.S. pharmaceutical industry. Investors have dumped shares of industry leaders, resulting in a 23% drop year-to-date for the Standard & Poor's Pharmaceuticals index. But we at S&P believe that this decline may present investors with some buying opportunities. Based in part on our conviction that the drug sector will show gradual recovery in the months ahead, we especially like shares of Wyeth (WYE ), formerly known as American Home Products.
Wyeth, of course, has been much in the news recently. The shares sold off sharply in early July upon the release of studies that highlighted health risks with female hormone replacement therapy (HRT).
But in the wake of that decline, the shares are now attractively priced. And other factors are working in the stock's favor. Wyeth's earnings growth is expected to exceed the drug-industry average over the next several years, driven by strong growth in established lines, new products, and greater penetration of foreign markets. In recent years, Wyeth divested less profitable consumer and agricultural businesses in an effort to focus entirely on higher-margin pharmaceuticals.
Wyeth is indeed a major factor in the HRT market with its Premarin estrogen and Prempro estrogen/progestin brands (13% of 2001 sales). However, S&P believes that investors are overrating the risks, as these products are expected to remain the main treatments for menopausal symptoms. Premarin has been on the market for 60 years, with over 11 million women using a Premarin product last year.
In early July, results from the Women's Health Initiative (WHI) study found Prempro was associated with increased risk of cardiovascular disease and breast cancer. Subsequent to the study, the National Cancer Institute (NCI) found that women on estrogen replacement therapy (Premarin) were at an increased risk for ovarian cancer.
S&P believes that the cancer risks in the NCI study were generally known for years, and the absolute incidence of adverse events in both studies were extremely small. For example, the risk of breast cancer in the WHI study was only 8 women in 10,000. In addition, the adverse events appeared mainly after five years of use, while most women typically are on HRT therapy for shorter periods.
Although the number of HRT prescriptions written dropped sharply in the first few weeks after the news, more recent data showed that weekly figures stabilized and began to inch up. While fallout from the studies and a more restrictive label are likely to result in a 15% drop in Premarin/Prempro sales in 2002, Wyeth's total HRT sales should stabilize at about $1.4 billion annual rate over the next few years.
S&P expects sales of other core Wyeth drugs to remain robust over the foreseeable future. We expect particular strength for compounds such as Effexor antidepressant, Protonix antiulcer, Prevnar vaccine for pneumococcal disease, and Enbrel for rheumatoid arthritis. Wyeth should also realize considerable royalty income from Johnson & Johnson's new Cypher drug-coated coronary stent, which incorporates Wyeth's Rapammune immuno-suppressant agent.
Unlike many of its Big Pharma rivals, Wyeth's core product portfolio has strong patent protection, with no major drugs coming off patent before the 2006-07 period.
Wyeth's product pipeline looks promising. Leading off the new drug lineup is Flumist, an inhaled flu vaccine that was co-developed with Aviron (now part of MedImmune). Administered as an easy-to-use nasal spray, Flumist could be a $500 million-plus product by mid-decade. Wyeth has also licensed its rhBMP-2 recombinant protein to Medtronic for use in the latter's spinal infusion treatments of long-bone fractures.
Other potential hits under development include low-dose formulations of Premarin and Prempro, and treatments for renal cell carcinoma, breast cancer, postmenopausal osteoporosis, and serious polymicrobic infections. S&P expects Wyeth's revenues to advance about 7% this year. Despite a decline in HRT sales, we see robust growth in other established lines such as Effexor, Protonix, and Prevnar. Revenues from alliances with other drugmakers should be bolstered by growth in Altace ACE-inhibitor and Enbrel for rheumatoid arthritis. However, sales of oral contraceptives will probably remain weak. Sales of OTC medications and animal health products are expected to be relatively unchanged.
S&P considers Wyeth's earnings to be of relatively high quality. After adjusting for stock option costs of 11 cents a share and pension expense of 15 cents, S&P's Core EPS totaled $1.92 in 2001, representing only a 12% drop from reported EPS of $2.18 (before nonrecurring items). The shares recently traded at 16 times S&P's estimated 2002 EPS of $2.50, a discount of approximately 20% from both the Big Pharma and S&P 500-stock index multiples.
On a p-e-to-growth basis, the shares were also valued at a 20% discount to their peers. S&P forecasts a 12-month target price of $55 for Wyeth, based on projected multiple of 20 times estimated 2003 EPS of $2.75. The drugmaker is moving aggressively to reduce debt ($7 billion at midyear) incurred to settle litigation related to diet drugs. It recently received about $1 billion in cash and a 7.7% interest in Amgen, resulting from Amgen's acquisition of Immunex (Wyeth had a 41% interest). Wyeth may seek to liquidate its Amgen shares (presently worth about $4.4 billion) during 2003. Based on the recent share price, the 92-cent annual dividend yields 2.2%.
Wyeth shares also offer one other appealing feature: the prospect that the company could be a takeover candidate amid continued consolidation in the pharmaceutical industry.
Analyst Saftlas follows pharmaceutical stocks for Standard & Poor's