Though it is on solid grounds with a sufficient cash balance of over $24.3 billion and healthy cash flow, Pfizer (PFE) has seen several disappointments from its ongoing research projects. Should these disappointments keep you from investing?
Trouble For Torisel
One such disappointment is related to its oncology drug Torisel, which is undergoing a third phase of research. Recently released results have shown that its performance is not significantly better than competitor Bayer/Onyx's product Nexavar (sorafenib). The drug was not able to achieve better results in progression-free survival of patients. Further, Sandoz, which is Novartis' (NVS) generic division, is about to market its generic version of Torisel, and it is against this that Pfizer has filed a patent infringement lawsuit. Currently, the drug Torisel is listed in the FDA's Orange Book for new chemical exclusivity until May 30, 2012, and orphan drug exclusivity until May 30, 2014. The firm has also filed an application for its extension until the year 2018. Since the lawsuit is yet to be settled, there remains an uncertainty over the company's future earnings with respect to its oncology drug segment.
Losses From Generics
Pfizer is also likely to lose some of its businesses in the form of generic versions of its products like Lipitor and Viagra to competitors from emerging economies like India. Some of the prominent Indian companies that are knocking on the door with generic versions are Ranbaxy Labs, Glenmark Pharmaceuticals, Lupin and Dr Reddy's Lab. The ensuing competition will force Pfizer to sell its products at considerably lower margins. Hence, this is likely to have a negative bearing on the company's growth in earnings over the coming year.
Pfizer's P/E ratio is currently around 11, which is way below the industry average of 16. The company also has very high revenue from its core business, which results in an excellent cash flow for its productivity. After posting a declining net cash flow in 2010, the company has substantially improved its financials in the completed year 2011 and the momentum continued throughout 2012. Total cash flow from operations has shown a positive trend in all the quarters of 2012, with the September quarter having as much as $ 5 million with the last quarter's earnings to be declared on January 29, 2013. The trailing twelve month revenue for the company for 2012 is about $62 billion, with an operating cash flow of about $17 billion. Pfizer has been providing a stable 3.6% dividend yield even though the company registered a negative quarterly earnings growth (year on year) of about 14%. With the third quarter's earnings behind it, the company is following its forecast. Pfizer can be considered as a stable and secure investment with low returns.
Merck (MRK) has been rewarding its stock holders with dividends on a regular basis. However, due to the recent run-up in its common share prices, the current dividend yield has dipped to about 3.8%. It has also shown rapid acceleration in its earnings growth for the past three years and is currently enjoying an EPS of 2.24, better than that of Pfizer. However, in spite of all the moves, the company has had to withdraw its application for its cancer drug ridaforolimus from the European Union due to its rejection by the FDA. But this could be looked at as a temporary setback.
GlaxoSmithKline (GSK) has seen negative revenue at $43.52 billion as per last year's figures. Further, it continues to face lawsuits courtesy of its so-called diabetes miracle drug "Avandia," which is reported to be a cause for cardiovascular failures. Though the company has been showing a decent net income, market risks have not been factored in the prices of its shares. The higher valuations at current level are not suitable for investments. However, investors who prioritize safety in their investments can consider buying at dips since it is a steady market player. The company boasts of an extremely low beta of about 0.53 only and an operating profit margin of almost 20%.
Novartis shares many similarities with Pfizer, but has a slightly lower P/E of about 17.5 and EPS of $3.55. The company also has a similar net profit margin and returns on equity as that of the Pfizer. However, its operating margin has not been steady. The current operating margin of the company is about 31%, which is well above its competitors, however its return on assets (ROA) is just about 6% (well below its competitors). Hence, its overall efficiency is considered to be on the lower side.
Pfizer is currently engaged in selling off its non-core businesses and is concentrating on restructuring itself into two divisions. This is more than likely to unlock its value. Pfizer has also completed the acquisition of a privately held company called NextWave Pharmaceuticals, which specializes in manufacture of ADHD treatment drug. The drug Quillivant XR manufactured by NextWave, is a stimulant and is meant for the treatment of the central nervous system. Due to increased awareness and treatment of ADHD, (Attention-Deficit-Hyperactivity-Disorder), this business will significantly add to the company's profitability. Thanks to this move, the company is likely to earn significant revenue from 2013 as the drug is scheduled to launch in January due to its exclusivity in North America post this deal.
Pfizer is trying to focus on its core expertise and is also trying to identify biotechnology companies for future drug launches instead of going for mergers and acquisitions. Like most pharmaceutical companies, Pfizer is an ideal "low risk, low return" investment. However, the stock is currently trading at a moderately high valuation. On the flip side, because the pharmaceutical market is growing at 4% to 6% annually due to growing access to healthcare and improving GDP, this growth is going to increase the profitability of Pfizer in the long run. Because of this, investors should buy and hold Pfizer for the long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.