The main talking points these days surrounding Pfizer (NYSE:PFE) continues to surround the company's perceived eroding drug pipeline. Shares closed Friday at $30.19, down half of one percent. The stock has traded flat on the year to date, trailing the health care sector's 13% gain.
Even so, very few drug companies have balance sheets that are as healthy of Pfizer's. Although recent patent ruling may have sedated the company'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. Pfizer is trading at a P/E that is almost 30 points below Merck (NYSE:MRK), 13 points below Novartis (NYSE:NVS) and 15 point below Sanofi (NYSE:SNY). This makes Pfizer a candidate for the best bargain in Big Pharma.
What's more, with improved cash flow and strong margins, these shares should trade at $40 in the next 6 to 12 months. This is because even on next year's earnings estimates of $2.26 per share, Pfizer's forward P/E of 13 points is still 7 points lower than the industry average of 20. And with second-quarter earnings due out Tuesday, investors looking for a strong name in the health care sector should get in now.
On Tuesday, Wall Street will be looking for 57 cents in earnings per share on revenue of $12.47 billion. Earnings is expected to increase by one penny from last year's mark of 56 cents while revenue is projected to decline by roughly 4%. But given Pfizer's strong history of solid performances, this quarter won't mean much in terms of the company's potential. More important is where Pfizer wants to go.
Management has been clear about its direction, especially in terms of its ambitions in oncology. This, among other reasons, spurred Pfizer to come to an agreement with Puma Biotechnology (NYSE:PBYI) to collaborate on neratinib, the company's breast cancer drug. Neratinib has proven very effecive in recent clinical trials, showing strong efficacy and posting a 33% disease-free survial rate when compared to a placebo.
On Tuesday management will be pressed for more details regarding the drug's progress. And when you combine Neratinib's potential with Pfizer's blockbuster arthritis drug Celebrex, which recently received a patent extension until Dec. 2, 2015, Pfizer has enough firepower to grow revenue and earnings for another 18 months.
There were concerns that Celebrex would lose its exclusivity in May. At which point, cheaper generics would hit the shelves and eat away at Pfizer's revenue. Analyst like Leerink Swann predicted revenue declines of close to 35%, dropping from $2.83 billion to $1.85 billion. That was not the case.
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%, meaning that Pfizer is able to earn almost $1 for each dollar it generates in revenue from Celebrex.
But Celebrex is just one of many products in Pfizer's pipeline that should keep the company's bottom line healthy for many years to come. As of May, Pfizer had well over 20 products that were in phase 3 development or later. With analsyts suggesting that breast cancer drug palbociclib can reach close to $2 billion in annual sales, Pfizer's future remains bright.
At around $30 per share, investors that are looking for exposure in the health care industry and values 3.5% dividend yield should not overlook Pfizer.
Disclosure: The author has 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.