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As I have written previously on Pfizer (PFE), I continue to recommend shares of the company as a turnaround play around the $15-$17 per share level, which equates to an even fatter dividend yield since I first wrote about the stock in July trading two bucks higher before the market meltdown occurred. Despite significant patent challenges to Lipitor and other products in Pfizer's portfolio over the next few years, the company's strong balance sheet, marketing muscle, and ability to bolster its pipeline through targeted acquisitions should provide investors with positive returns from what appears to be a ridiculous valuation in the low teens.

Pfizer reported 2Q08 revenues of $12.1B and adjusted EPS of $0.55, which were both ahead of consensus analyst estimates for the quarter. The company also affirmed its full-year revenue ($47B - $49B), earnings ($2.35 - $2.45 per share, adjusted), and cost-savings ($1.5B - $2B) guidance for 2008. Pfizer posted strong results in its animal health segment and brand drug sales for Lyrica, Celebrex, and Sutent.

Animal health sales for 2Q08 were $715M, representing an increase of 13% from the year-ago period. Total pharmaceutical sales increased 9% from the year-ago period to $11.1B, including a significant 7% benefit from currency exchange rates due to international sales and a weak US dollar.

The company also reached an agreement with Indian generic drug maker Ranbaxy to delay a copycat version of the world's best-selling (with $12.7B in 2007 sales) drug Lipitor in the United States until December 2011.

During 2Q08, Pfizer repurchased $500M of its own stock or about 26.4M shares. With a dividend yield over 8% and the deal with Indian  Ranbaxy to delay the copycat version of Lipitor for over one year until late 2011, shares of Pfizer merit a buy while trading in the low teens for both income investors and those seeking a safe haven investment during the current bear market.

The deal with Ranbaxy to delay generic competition for Lipitor provides Pfizer with more time to develop and acquire follow-on blockbusters for what will be a loss of patent protection to the company's best-selling drugs beginning in late 2011 with Lipitor, which accounts for about one-quarter of total sales. Pfizer is committed to maintaining its dividend, with expected cost savings for 2008 expected to total $2B and cash flow from operations of at least $17B in 2008, up from just $13B in 2006.

The company has over $26B in cash and repurchased $10B worth of its own stock in 2007, with another $5B authorized for the current year. Despite valid concerns of patent losses beginning in late 2011, Pfizer represents a buy in the low teens with a dividend yield of 8.5% and plenty of cash on the balance sheet, which gives it the flexibility to bolster its late-stage pipeline through acquisitions and buy back its own stock.

However, I think Pfizer should consider a larger biotech acquisition such as Biogen (BIIB), which has put itself up for sale, but since returned to the low $40s with a market cap of $12.4B. Biogen would bolster Pfizer's late-stage pipeline with biological agents, in addition to adding products such as Avonex, Rituxan, and Tysabri.

The biotech industry is rapidly consolidating as big pharma companies put their cash stash to use in deals ranging from well-known large caps all the way down to unknown micro-caps in an effort to bolster their range of marketed products, late stage pipeline candidates, and drug discovery technology platforms. Genentech (DNA) has rejected Roche's (OTCQX:RHHBY) $89 bid to acquire the remaining 44% of DNA it does not already own as insufficient.

I think DNA could easily get $100 per share based on Eli Lilly's (LLY) $70 buyout of ImClone Systems (IMCL), which trumped Erbitux marketing partner Bristol-Myers' (BMY) raised bid of $62 per share. Also, several buyouts in the out-of-favor small and micro-cap biotech space have been announced over the past year with 100%-plus takeover premiums, including under-the-radar names such as:

(1.) SGX Pharma (SGXP) was acquired for $64M cash by Lilly for its cancer drug discovery platform

(2.) Kosan Biosciences (KOSN) was acquired by Bristol-Myers for its cancer drug pipeline

(3.) Barrier Therapeutics (OTC:BTRX) was acquired by privately-held Stiefel Labs

(4.) Pfizer's $164M cash buyout of cancer drug developer Coley Pharma (COLY)

(5.) Shionogi (Tokyo: 4507) recently closed its $1.4B cash buyout of Sciele Pharma (SCRX)

My guess as to who may be next is based on the following factors:

  • Existing big pharma partnerships: Bayer + Onyx Pharma (ONXX)
  • High margin orphan drugs: Kuvan – BioMarin (BMRN) & Soliris – Alexion (ALXN)
  • Revolutionary drug discovery technology platforms: RNAi for Isis Pharma (ISIS) & Alnylam (ALNY
  • A late-stage pipeline + approved biological agents: Biogen (BIIB)
Source: Even Fatter Yields for Pfizer; M&A Targets in the Sector