This is a year of transition for Pfizer, since Lipitor has to compete with generic versions of the drug. Between budget cuts, lost revenue, and structural transformation, this may not be a real growth year for the company. Taking a look at its challenges, there is an opportunity to capture short-term income this year.
Click to enlarge.
The analysts have not given any growth projections this year for the company.
Drop in Sales from Increased Competition
Pfizer, for the first full year, is facing generic competition for its drug Lipitor. This is significant considering the cholesterol drug has been the best selling drug in the world. Ranbaxy Laboratories out of India will resume exporting drugs to the U.S. and Europe after a ban in 2008 when the US FDA found it was not following specific manufacturing practices. They were again approved for import in October of 2011. This is having a direct effect upon Pfizer, because the company will be exporting anti-cholesterol generic tablets called Atrovastatin. The company received approval from the US FDA to manufacture and market Atorvastatin 10mg, 20mg, 40mg and 80mg tablets.
Pfizer's Cost-Cutting Measures
This new competition is causing Pfizer to take a hard look at spending and cutting costs in anticipation of losing market share. It is already struggling with sales losses. They are exploring ways to cut $1 billion in spending this year. Pfizer has laid off over 25,000 workers in the last three years and is cutting back severance pay also. For workers who are laid off, severance pay will drop from 12 to 8 weeks and health care benefits will also end after 8 weeks instead of a year.
The company is also taking a good look at its ad agencies and the spending it does there for marketing its products. Pfizer regularly reviews this area, but this time-according to people close to the situation, this review is part of a broader initiative to slash Pfizer's expenses this year. Pfizer spends $2.12 billion in the U.S. alone on ads. This review fits into a larger trend of marketers' calling on agencies to share the burden of finding cost efficiencies for Pfizer.
From a long-term perspective, Pfizer may continue to be a good buy. As it continues to transform itself from a R&D company to growth through acquisition, it may save money and find good companies to purchase with effective up and coming drugs. But for the short term, the company has almost reached its 52 week high. With the cost cutting taking place and a less than stellar revenue forecast for the year, we believe the stock may not move much in the short run. In fact may even pull back. In the short run, here's an opportunity for a short term options play on an anticipated pullback.
Presently trading at 22.34, we like a bear Put Spread here.
The Option Play
- Buy a September 2012 '22' put (priced at $1.18)
- Sell a September 2012 '21' put (priced at $0.77)
- Net Debit to Start: $0.41
- Maximum Profit: $0.59
Reasoning behind the Play
- Pfizer is not expected to do as well as last year's revenues.
- Cost cutting measures could drive investors away short term.
- Continued transformation from R&D to acquisition could continue to make the stock ambiguous and dis-interesting short term.