Pfizer Inc. (NYSE:PFE) shares are down nearly 5% so far this year. The stock had traded around $32 until the end of April, but saw a sharp decline after AstraZeneca (NYSE:AZN) rejected the company's takeover offer in May. However, the pullback should be seen as a buying opportunity as there are some compelling reasons to go long on the stock.
Strengthening Vaccine Portfolio
Although Pfizer's portfolio includes the best-selling vaccine in the world, Prevnar 13, the company's vaccine division has been trailing those of Merck (NYSE:MRK), Sanofi (NYSE:SNY) and GlaxoSmithKline (NYSE:GSK). Some recent developments though have allowed Pfizer to close the gap.
Last week, Pfizer announced that the U.S. FDA granted a Fast Track designation to its investigational vaccine candidate for Clostridium difficile (C. difficile). The vaccine candidate, PF-06425090 has been designed to prevent C. difficile-associated disease and is currently in Phase 2 clinical development. A Fast Track designation is granted to drugs that treat a serious condition for which there is an unmet medical need. The FDA expedites the review process for a drug that has been granted a Fast Track designation.
According to the Center for Disease Control and Prevention (CDC), around quarter of a million people who are hospitalized or require hospitalization contract C. difficile each year. In most cases, the infection is related to the use of antibiotics. The disease kills around 14,000 people each year.
Currently, there are no vaccines available for C. difficile-associated disease. Apart from Pfizer, a vaccine for the disease is being developed by French drug major Sanofi and Valneva. Back in May, Sanofi took the lead in the race to develop a vaccine to prevent C. difficile after the company reported positive results from a Phase II trial for its investigational vaccine, H-030-012. However, the granting of the Fast Track designation has allowed Pfizer to regain some lost ground.
It will be interesting to see now if Pfizer can capitalize on the Fast Track designation and hit the market before Sanofi. The reward is huge, given that there are no vaccines currently available to prevent C. difficile. According to analysts at Morningstar, the market for C. difficile treatments could reach $2 billion once the preventive vaccines are available.
Recently, Pfizer also reached an agreement to acquire Baxter International Inc.'s (NYSE:BAX) portfolio of marketed vaccines for $635 million. The $635 million gets Pfizer NeisVac-C, a meningitis C vaccine, and FSME-IMMUN/TicoVac. The vaccines are available outside the U.S. as well. The acquisition also includes a manufacturing facility in Orth, Austria.
Last month, the company also announced the FDA acceptance of the Biologics License Application (BLA) for its vaccine candidate for the prevention of meningococcal B. Additionally, the FDA has granted a Priority Review for the BLA and set a PDUFA action date of February 14, 2015.
This means that with the closure of acquisition of Baxter's vaccine portfolio, which is expected to be by the end of this year, Pfizer could have a significantly strengthened vaccine portfolio by early next year. Vaccine is a major growth area for Pfizer. In the second quarter of 2014, the company's global vaccines revenue rose 14% operationally. However, the growth was driven primarily by Prevnar 13. This means that there is a risk. By strengthening its vaccine portfolio, Pfizer is ensuring that it is not heavily reliant on Prevnar 13.
Potential Tax Inversion Deal
The main reason Pfizer pursued AstraZeneca was the chance to move its headquarters from the U.S. to the U.K. Tax inversion deals, which allow companies to reincorporate outside the U.S., have been very popular, especially in the healthcare sector. In fact, data from Mergermarket shows that the first half of 2014 saw deals worth $260.2 billion announced in the global pharma, medical and biotech industries. This represents an increase of 227.8% over the previous year. The significant increase in M&A activity was mainly driven by a few cross border deals. The purpose behind most of the cross border deals was the chance to lower tax rate by reincorporating in a lower tax jurisdiction like the U.K. and Ireland.
AstraZeneca rejected Pfizer's bid, however, it is likely that the U.S. pharma major might come out with a new bid. In a recent conference call, Pfizer's CEO said that the company will continue to look for potential M&A opportunities. The company is also open to tax inversion deals despite opposition from lawmakers to any such deal. A potential tax inversion deal would boost Pfizer's bottom-line, given that its revenue outside the U.S. would be subject to a corporate tax rate significantly lower than the 35% it pays in the U.S. An acquisition like AstraZeneca would even boost the company's vaccine portfolio.
Pfizer Attractive At Current Level
The two reasons I have mentioned above make Pfizer an attractive investment proposition, especially given the dividend yield. Pfizer currently has a dividend yield of 3.55%. The potential returns can be further boosted by implementing a covered call strategy i.e. going long on Pfizer stock and writing call options.
I plan to write an October 30 call option. The open interest was above 41,000 in mid-day trading on Wednesday. At last check, the option premium was $0.27. The expiration date is October 10th, 2014. If the option expires out-of-the-money, I plan to write another call option for December expiration. The covered call strategy has the potential to boost annual return on Pfizer shares by around 5 percentage points.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.