Pfizer's Period Of Slow Growth May Be Behind It

Dec.14.12 | About: Pfizer Inc. (PFE)

In 2011, after its merger with Wyeth, Pfizer (NYSE:PFE) became the world's largest pharmaceutical company. Although the phrase has a certain ring of power to it, it is best described as a struggling-to-save-face company at this point. The merger failed to provide any impressionable edge to Pfizer and did nothing to prevent the 60% loss of its market value from the previous decade. The leaders of the organization may gloat about being part of a colossal takeover and the fact that their cases are taught at Harvard as an example. However, investors know that Pfizer has been scraping to cover up the double digit drop in its market share. Nevertheless, in spite of disappointment in sales, its recent moves seem to be headed to making amends.

The last decade saw the company jump the merger bandwagon and take over three major pharmaceutical contributors: Wyeth in 2011, Pharmacia in 2003, and Warner Lambert in 2000. Economists anticipated major revenue gains. Unfortunately, the loss of patent protection for its record breaking drugs caused more damage than anticipated. According to a Deutsche Bank analysis, Pfizer risks $35 billion in revenues because of this deprivation. Lipitor and Viagra, the best selling drugs of their times, have lost their former glory. Pfizer lost patent protection on these in fall 2011 so generic substitutes are readily available now. Lipitor's sales singlehandedly contributed to a 19% decline in the expected revenue of the first quarter of the year. Despite the upset, the company's 52-week low dipped to about $20.23 whereas its 52-week high peaked to $26.09, a sign of a consistently above average stock price.

With the advent of the 21st century, Pfizer aimed to enter the golden age of drug discovery. Ironically, it rose to power with the acquisition of three major drug companies instead of its main breakthroughs. However, it faced swing and miss situations with the mergers and was forced to revise its vision. Pfizer has been able to maintain a stock price of about $25.43 in 2012 because it made major cuts in its R&D budget, from $11 billion to $8.5 billion. In order to stay at the top of its game, it has shifted its focus to the production of generic drugs and research on more important diseases such as cancer and Alzheimer's. Its game plan has changed to becoming smaller instead of acquiring more. In April 2012, it sold its nutrition business to Nestle for $11.85 billion and further plans to make another major sale in 2013. These moves have been able to pacify the skeptics so far since generic drugs account for a greater share in the market, such as 75% of the US prescription drug market.

Investors seem to have multiple, varying opinions where Pfizer's performance in the stock market is concerned. It is divided into half between the skeptics and the optimists. The former believe that Pfizer has been a pharmaceutical tycoon because of its extensive research and development program, and slashing this budget over declining sales may not be the right approach since the company could have discovered another blockbuster drug. However, the optimists believe in the power of de-bottlenecking: Pfizer needs to get out of this sticky situation and a few compromises never hurt anyone.

Many analysts have compared Pfizer's last decade to a Frankensteinish behavior. It seems an appropriate analogy since the company acquired varying smaller companies in its thirst for power, yet ended up progressing with little purpose. It kept expanding without any extraordinary drugs in the pipeline and lost patent protection for two of its most famous products. Therefore, the last decade was perhaps the most promising for its competitors: Merck (NYSE:MRK), Glaxo SmithKline (NYSE:GSK), Novartis (NYSE:NVS), Bristol Myers Squibb (NYSE:BMY) and AstraZeneca (ADR). However, I believe that phase is over, because the losses seemed to have knocked some sense into the decision makers at Pfizer. Once the company realized the errors of its ways and attempted to make amends, things started looking better and the profit decline decreased. Although the stock shows little promise to active investors, I think the long termers are in for a kick. Pfizer Pharmaceuticals is the leading business in its domain for a reason and its recent changes support that prerogative. Although it shows little signs of trending upwards any time soon, the company has a dividend yield of 4.2%, which promises a low-risk gradual rise investment for those with a long-term horizon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was prepared for Freedonia Freelance by one of our analysts.