The overarching market thesis surrounding Pfizer (PFE) reflects a 2013-and-on investment opportunity. Cautiously I suggest that many of the core elements to support the run up that initiated in mid-2011 (see chart) are not evident.
First, the R&D pipeline that is required to support the heightened valuations fails to offer enough upside to warrant new investment considerations. The existing late-stage pipeline is modest at best and the company has unfortunately established a track record of failing to develop (articles 1, 2, 3, 4) and promote new drugs while debasing its R&D capabilities.
Those in-house compounds that have recently advanced have failed to differentiate themselves in stage III trials or represented marginal line "add on's" at best. The only noteworthy recent win has come from the Bristol-Myers Squibb (BMY) co-promoted product (Eliquis/Apixaban) and one could question the net benefit to Pfizer given its decreased sales force. Essentially, the company had received a $0 valuation for its pipeline and research efforts in recent years, however this now appears to be the primary catalyst though I fail to recognize any significant advancements in this area.
Secondly, for inline and newly developed drugs, the once infamous distribution capabilities of Pfizer are highly diminished. The company now operates with a fraction of the reps that it once boasted and increasingly employs less productive contracted sales reps. Further, CEO Ian Reed's stated M&A philosophy of looking at "bolt-on" acquisitions will only serve to dilute the focus of existing reps as their bags become increasingly crowded. This approach coupled with increasingly stringent physician access legislation and no compelling contracting story to drive payer access and one could argue that the overall market opportunity for and reach of Pfizer has substantially eroded.
Third, though the company continues to report continued growth in established products (a new division) and emerging markets, the margin impact and future risk associated with this strategy remains greatly understated. The overall pace has slowed somewhat but across the board pharmaceutical price cuts have become the norm within the healthcare administrations across Europe, Asia and LatAM. These risks are further compounded by FOREX fluctuations which have driven performance in many recent quarters though broke against the firm in its last reported period.
The company is also susceptible to macro pressures domestically as HCR in the US and budgetary deficits will clearly have the current administration at least entertaining pharma reimbursement cuts. Further, Pfizer has largely relied on its ability to raises pricing though the current environment has come to challenge such moves.
Finally, the company has done a notable job in distorting the baseline in recent years. The CFO, Frank D'Amelio, has engaged all resources to give the impression of a straight line improvement in results; however, a closer review may suggest that he has emptied his gun at this point. Marginally beneficial acquisitions, spin-offs, reorganizations and deep expense cuts represent the primary levers that have been used to achieve this performance without us witnessing any revenue lift.
Despite the attractive dividend story, I fail to see the necessary drivers to support the continued run up.