Even Fatter Yields for Pfizer; M&A Targets in the Sector

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 (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 (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)

Comments

[Vmatulis:]

Pfizer will go spend money on acquisitions. The strategy change will require new pipelines.
Watch for EPicept EPCT (drug just approved in Europe), Canada und US is coming.
ENMD and other small cancer firms will benefit.

2008 Oct 17 07:35 AM

[Shiv Kapoor:]

Agree. Looks like PFE has now got new direction. At last the management is re-energized.
1. Pipeline is looking good; that they achieved phase 3 size targets a full year ahead.
2. They have a very good in-licensing strategy.
3. They are focused on EM’s revenues to reduce fall off after patent expiry because EM’s buy brands.
4. They are cutting costs to right size the business post Lipitor.
5. They have recently re-focused on biologics and stem cell. This is not merely high margin & growth business; it is also an area where patents are easier to protect & extend. Besides, even post patent the drug is hard to replicate.
6. They are exiting a significant area of past success with confidence; presumably because cardio, obesity, bone etc, is dominated by synthetic drugs which carry major patent cliff risks and RoI is no longer great.
7. They are entering generics to monetize their marketing advantage and decimate the competition.
8. They have paid to eliminate management distraction from litigation on Celebrex & Dextra.
9. Their cash hoard will serve them well in riding out a prolonged recession and their dividend yield should limit down-side caused by an extended depression.
10. The results should begin to show soon as there has been sufficient passage of time since initiation of efforts.
I have never doubted Pfizer's long term science will pay off; their IP is not valued. Now have I ever doubted the industry growth potential; demographics point to growth potential together with the fact that several therapeutic areas do not have cures today. I have never doubted their marketing prowess. The only thing I had reservations on was the present management; and now that looks to have changed.

2008 Oct 17 09:33 AM

[willytheg:]

Anybody out there follow a little biomed in Petaluma, CA named Oculus Innovative Sciences OCLS. From the DD I've done on the fundamentals of their product they are ripe for either a tenfold increase in pps or one of the bigger biotech companies are going to make ground floor execs and shareholders very wealthy.

They have developed a safe, inexpensive and effective platform to deal with MRSA, MSSA, VRE named "Microcyn". It's currently deployed or about to be deployed in China, India, and Mexico.

I'd love for somebody to check this out and tell me it's voodoo while it's still under $2/share. It was up 10% on the day the DJIA was down 773 last week.

2008 Oct 19 12:10 AM