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Friday, March 27,
1998
Quigley Co.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QGLY)") else Response.Write("(Nasdaq: QGLY)") end if %>
Phone: 215-345-0919
Website: http://www.quigleyco.com
Price (3/26/98): $11 1/4
HOW DID IT FIND TROUBLE?
Gesundheit! This was supposed to be Quigley's time to shine. The maker of
Cold-Eeze lozenges had grown sales from just below $5 million in 1996 to
just over $70 million last year.
Owning a clinically proven cold remedy should have been a bonanza over this
prolonged winter, with the likes of the Centers for Disease Control and
Dateline NBC proclaiming this one of the worst cold and flu seasons
on record.
Colds were hot. Cold-Eeze was hot. But Quigley ran cold. Pharmaceutical giant
Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %> introducing a Cold-Eeze clone, and the
high margin livelihood of Quigley was called into question. Last year's growth
was due primarily to filling the retail distribution channel to the point
where production not only met demand -- Cold-Eeze was now available at just
about every drugstore chain -- but the future growth of Quigley was called
into question as well.
So Wall Street sneezed, shareholders sniffled, and Quigley called in sick.
BUSINESS DESCRIPTION
Pennsylvania-based Quigley's sole product is Cold-Eeze, a zinc gluconate
glycine lozenge that has been shown in clinical studies to shave as much
as three days from a typical weeklong cold.
FINANCIAL FACTS
Income Statement
12-month sales: $70.2 million
12-month income: $21.0 million
12-month EPS: $1.43
Profit Margin: 29.9%
Market Cap: $165.4 million
Balance Sheet*
Cash: $7.7 million
Current Assets: $28.8 million
Current Liabilities: $6.3 million
Long-term Debt: $0.8 million
(*As of Sept. 30, 1997)
Ratios
Price-to-earnings: 7.9
Price-to-sales: 2.4
HOW COULD YOU HAVE SEEN IT COMING?
Followers of Breathe Right nasal strip maker
CNS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNXS)") else Response.Write("(Nasdaq: CNXS)") end if %> may have seen this coming. The crashes have been similar. Just
as consumers clamored for the sticky cardboard strips to relieve breathing
disorders after seeing Jerry Rice running down the sideline with a Breathe
Right strip on his nose, Cold-Eeze's popularity had a meteoric rise as well.
Between scientists from the Cleveland Clinic holding up a bag of Cold-Eeze
when they announced the zinc formula effectiveness at combating the common
cold to an ABC 20/20 segment calling Cold-Eeze "the only one that
works," retail chains soon began stocking the trendy fix that had been primarily
QVC Network sales fodder in the past.
A year ago the $12.3 million order backlog was 2.5 times greater than Quigley's
trailing annual sales. It may have left prospectors euphoric, but as the
company ramped up production, with Cold-Eeze finding its way onto the shelves
of 90% of domestic drugstore chains, it should have given investors a reason
to consider what would happen once the market had been fully penetrated --
and what would happen when better funded pharmaceutical firms found Quigley's
30% net margins too enticing not to enter the fray.
WHERE TO FROM HERE?
Quigley is too dynamic to deem as rudderless, but sometimes one has to wonder
if the company itself knows where it is sailing. In January the company announced
that fiscal results would equal the analysts' consensus estimate, only to
eventually top it by a dime a share a month later. Then the company alerted
investors that the current quarter would be weak due to a mild cold season
-- while every other source, including no doubt your congested spouse, has
been saying otherwise.
Then again, nothing is ordinary at Quigley. The company has been associated
with questionable stock touts and accountants in the past, but has cleaned
up its image on the way to legitimacy. Yet despite the improbable success
of Cold-Eeze, Guy Quigley's company continues to be a humble operation, run
out of a converted church in Doylestown, Pennsylvania, with a meager payroll
of just 14 employees.
Besides the low corporate overhead, Quigley is selling a single product that
is cheap to produce, but at a hefty premium that cold suffering patrons are
willing to pay. That is why the margins have been so strong. But now Cold-Eeze
is battling Halls Zinc Defense, which usually retail for $5.99 a bag, with
dueling promotional discounts. Cold-Eeze must remain sharp because while
it had an 8-to-1 lead over Zinc Defense back in October, that has been trimmed
to a mere 4-to-1 advantage recently.
Quigley's patent prohibits an exact knock-off, and the Halls product is simply
a zinc acetate, but the similarities have blurred consumers to the point
that if either one decided to cut prices permanently, the other would probably
have to follow suit and the margins would obviously contract for both parties.
That is why one of the fastest growing companies of last year is selling
for just 8 times trailing earnings today. Despite the move to international
distribution, with globetrotting deals in place for a Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> subsidiary to distribute Cold-Eeze in Canada and a foray into China
inked just last week, domestic concerns weigh heavy.
But now Quigley is trying to market its zinc lozenge as an allergy reliever.
If successful, it should eeze the company's burden of being not only
a one-product company, but also a seasonal one at that.
While one can speculate that even with no earnings growth this year the company's
valuation makes it vulnerable to buyout offers from the drug powerhouses,
possibly even Warner-Lambert itself, that is certainly no reason to buy into
Quigley. Yet finding a niche leader with a single-digit P/E multiple is at
least an interesting situation to monitor closely. If the company can capitalize
on its brand to expand its product line as well as its reach, the cold that
investors may be catching could be cold, hard cash.
-Rick Aristotle Munarriz
([email protected])
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