Shares of Pfizer (NYSE:PFE) have traded relatively steady last week. This is even though the shares ended down on the week more than 3%. The good news is that shares are up almost 3% on the year to date.
When investors received word Wednesday that the stock had been halted, there was a sense of "what else can go wrong with this company?"
Ever since Pfizer spun-off Zoetis (NYSE:ZTS) earlier this year, which was finalized last year, it has been one hiccup after the other. I say "hiccup" because Pfizer's operational struggles were never as bad as the analysts made it out to be.
So on Wednesday, the company's critics received that "I told you so" moment they've been waiting for. But here again, the exaggeration was apparent.
Shares were halted Wednesday because a federal court rejected a key patent for Celebrex, one of Pfizer's most lucrative arthritis drugs. Celebrex treats illnesses related to osteoarthritis, rheumatoid arthritis and juvenile rheumatoid arthritis in children and adults.
With close to $3 billion in revenue last year, Celebrex ranks as Pfizer's fourth-bestselling product. Even more impressive is that the drug has the potential to exceed gross margins of 90%.
This means that Pfizer is able to earn almost $1 for each dollar it generates in revenue. Yet, all we hear about is how poorly this company performs from a revenue perspective. But we're in a bottom line business. And from an operational perspective, very few can match Pfizer margins. Not Eli Lilly (NYSE:LLY) or Novartis (NYSE:NVS), which are often perceived as better-run companies.
But understand, I'm not making excuses for Pfizer. Celebrex is, without a doubt, a top-notch performer. So I don't want to downplay the potential adverse impact to Pfizer, if the ruling is upheld.
But Pfizer is not taking this lying down. According to the Associated Press, in response, Pfizer said it disagrees with the ruling and vowed to "pursue all available remedies," including immediately appealing Wednesday's ruling.
And let's assume for a moment that the ruling is upheld. It's not as if management hasn't prepared for this possibility. On more than one occasion, Pfizer has made it known that its drug pipeline is its main objective. Plus, management would still have 18 months to make the necessary adjustments before generic competition hits the shelves.
There's already word that Mylan (NASDAQ:MYL) plans to launch its own version of Celebrex. Mylan has every right to do so. But there are no guarantees of success. And this is another mistake investors often make.
Just because a company loses a patent, it doesn't mean they will lose the business. In this case, Mylan still has to compete with the branded version of Celebrex, a trusted drug that has been around for a decade.
And whether Mylan or any other company wants to take on Pfizer, their profits have to make sense to support the ongoing production of the drug. Unless they are unable to justify the production costs with solid margins and/or some meaningful profits, they won't waste any time developing the drug. That's the way it works. Pfizer's management, which is strong at marketing, understands this. Manufacturing the drug is one thing. Getting the drug into the hands of customers will cost money.
As it stands, very few drug companies have balance sheets that are as healthy of Pfizer's. Although Wednesday's patent ruling may have sedated Pfizer's progress, it shouldn't keep the company down for long. With the stock trading at a P/E of 9, these shares are still cheap. With improved cash flow and strong margins, these shares should trade at $40 by the end of this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's healthcare sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.