Health care dividends can provide a stable income stream to retiree investors. Pfizer (PFE) was a perennial 1990's growth stock. Pfizer has been relegated to a dividend stock with a 4% yield. In this article I'll focus upon the Pfizer of old and present. I will present a few accretive acquisitions which I would like the company to consider to restore the company to its glory days.
Pfizer was founded by two cousins, chemist Charles Pfizer and confectioner Charles Erhart in Brooklyn, New York in 1849. Their first product was an immediate success and was made by blending santonin, an antiparasitic, with almond-toffee flavoring and shaping it like a candy cone. In its 1860s, Pfizer produced chloroform, iodine and morphine for Union Army troops engaged in the Civil War. In the 1880s, Pfizer became America's leading supplier of citric acid to Coca-Cola (NYSE:KO), Dr. Pepper (NYSE:DPS) and Pepsi-Cola (NYSE:PEP). Then, Alexander Fleming discovered penicillin in 1928 and set the stage for Pfizer's pharmaceutical success after Pfizer mass produced penicillin for World War II.
In 1942, Pfizer held its initial public offering (NYSEARCA:IPO) and became a publicly-traded company. In 1950, Terramycin, an antibiotic, became Pfizer's first pharmaceutical to be sold in the U.S. and the company also launched its international division. As it expanded internationally, Pfizer also began making acquisitions to supplement its core business and expand research. The 1980s saw a slew of new drugs and the formation of its Animal Health Division. In 1998, Pfizer launched Viagra, its erectile dysfunction best seller.
Today, Pfizer is a member of the Dow Jones Industrial Average and a world leader in pharmaceutical research, development, production, marketing and distribution focused on creating and using innovative new research, know how and technology to tackle diseases such as Alzheimer's, cancer and diabetes.
Research and development (R&D) to develop healthy pipeline of new drugs with commercial potential lies at the core of everything that Pfizer. Pfizer's R&D focuses on areas with high scientific and commercial potential, investments in new technologies to drive innovation and an R&D ecosystem that successfully develops and delivers approved drugs.
2011 revenue decreased by 4.64% from 2010 levels. The company needs growth and the internal R&D is not providing the necessary pipeline.
Pfizer's business depends on successfully running efficient and approved manufacturing plants, speedily getting regulatory approvals, effective sales and marketing, and running a highly-sophisticated supply chain that gets drugs to users across the world.
Pfizer also needs to continuously focus on issues such as pricing and manufacturing productivity to compete against branded and lower cost generic drugs, to fight off fake Pfizer-branded medicines, and ongoing litigation tied to asbestos claims, patent expiration and litigation issues, patient lawsuits and so on.
Pfizer is rather active on the M&A and business development front with four acquisitions in 2011, one divestiture (of its CapsuGel business for $2.4 billion) and multiple partnerships of significance across the globe.
So far, Pfizer's strategy of organic and acquisition related growth appears to have delivered results but as the company grows in size, managing its vast organizational apparatus becomes a challenge in itself. Sometimes large acquisitions, such as its Wyeth acquisition in 2009, can impact shareholder value and reduce dividends so shareholders must watch and vote to make sure management does not erode shareholder value.
To make the company more manageable and potentially unleash hidden shareholder value, Pfizer may spin off its Animal Health and Nutrition business, with an announcement expected in 2012.
Pfizer is at a size where achieving high year on year growth organically gets challenging. Results too reflect this size effect. For fiscal 2011 ended December 31, Pfizer generated revenues of $67.4 billion, just about 1% more than 2010 and that too from favorable exchange rates and an acquisition. Approximately 40% of its revenue was from U.S operations and 60% from international, with U.S. revenues down 7% and international revenues up 6% in 2011. Pharmaceuticals contributed 86% to total revenue.
2011 earnings from continuing operations was $8.7 billion, $0.5 billion higher than 2010 due to 2011's lower asset impairment charges, lower fair-value accounting impact, lower merger related costs and a $1.3 billion asbestos litigation fee that dragged 2010 results down.
2011 net income was $10 billion, 14.8% of revenue on a percentage margin basis and up 21% from $8.3 billion in 2010. Diluted EPS was $1.27, up from $1.02 in 2010. For 2012, Pfizer expects revenues of $60.5 billion to $62.5 billion, substantially lower than 2011, and diluted earnings per share of between $1.37 and $1.52.
Pfizer ended 2011 with $3.5 billion in cash and cash equivalents, $188 billion in total assets, $34.9 billion in long-term debt (a manageable 18% of total assets) and shareholders' equity of $82.6 billion. Pfizer also generated $20.2 billion in cash from operations, up from $11.5 billion in 2010.
In December 2011. Pfizer declared a 22-cent dividend for its first quarter in 2012, a 10% increase from the 20-cent quarterly dividend paid in fiscal 2010. Pfizer's Board also approved a $10 billion share repurchase plan that calls for $5 billion in buybacks in 2012 and $5 billion in 2013 and beyond.
Pfizer consistently increased annual dividends from 52 cents in 2002 to $1.28 in 2009 but then dropped dividends to 80 cents in 2009 and 72 cents in 2010 following its acquisition of Wyeth, but appears to be ramping dividends back up again.
With shares trading at about $22.33 as of April 17, 2012, Pfizer has a dividend yield of 4%, and a price to earnings multiple of 17x.
Merger and Acquisition Targets
One company Pfizer should consider is Alexion Pharmaceuticals (ALXN). The company has blossomed with new product discoveries.
Alexion Pharmaceuticals is a biopharmaceutical company established in 1992. The company is engaged in the research, development and commercialization of drugs used to treat ultra-rare diseases. These diseases are often life threatening and currently have no known cure.
The company was established in New Haven, Connecticut 20 years ago by Dr. Leonard Bell. The company became publicly traded in 1996 under the symbol ALXN. Today, Alexion has turned into a global company and employs 1,000 people across the world. The acceptance of Solaris by many different countries as a treatment for PNH has greatly contributed to Alexion becoming a global company.
Alexion currently has operations in Japan, Canada, Brazil, and Australia. The regional headquarters for EMEA (Europe, Middle East & Africa) is located in Lausanne, Switzerland. As more countries approve Soliris as a treatment for both PNH and aHUS, Alexion can be expected to establish more bases of operations.
Not only is Alexion increasing the number of its operations on a global scale, it has also acquired another company that is focused on developing treatment for ultra rare diseases. Alexion recently completed the acquisition of Enobia Pharma Corp.
Soliris is the first product successfully created by Alexion. Solaris is used in the treatment of paroxysmal nocturnal hemoglubinuria (PNH). This is a rare type of blood disease that is defined by the destruction of red blood cells or hemolysis.
Alexion is also working urgently in testing Soliris on other forms of ultra-rare diseases. As these diseases do not currently have any known cure, Soliris can be considered as a hope for a patient with this disease.
In 2004, the New England Journal of Medicine published an article that detailed the effects of Soliris on PNH and hemolysis. In 2006, the same journal published the Phase III results of Soliris and showed that the new drug can effectively reduce the symptoms of PNH.
In the subsequent years, Soliris received approval from the US FDA for the first treatment of PNH. Soliris was also approved in Europe and Japan. Today there are 35 countries that have approved Soliris in the treatment of this ultra-rare blood disorder.
Soliris was also found to be effective in the treatment of another ultra-rare disease, atypical haemolytic uremic syndrome (aHUS). Alexion also received approval for Soliris to be used as a treatment. Currently the company is testing Soliris on other forms of ultra rare diseases.
Soliris is the only drug in Alexion's pipeline to have so far reached the commercialization stage. Alexion is currently testing 6 other drugs. These are TT30, ALXN1007, Asfotase Alfa, cPMP Replacement Therapy, Samalizumab, and TA106.
One of the drugs, Asfotase Alfa, is currently being developed by the company to be used in the treatments of an ultra rare disease known as Hypophosphatasia (HPP). HPP is an ultra rare disease that characterized by defective bone mineralization. This disease causes an impaired phosphate and calcium regulation that lead to the deformity of bones and failures of internal organs.
The disease does not currently have a known cure and Asfotase Alfa will hopefully show positive results in clinical trials. Hopefully the drug will be able to prevent the spread of the disease in the human body or even reverse the effects of HPP.
Alexion can be considered to have grown very rapidly since its inception. The rapid growth of Alexion can be attributed to its success with Soliris. Though the success did not come overnight, it has fuelled the company's desire to research and develop other drugs to be used in the treatment of other ultra-rare diseases that have no known cure.
Many patients with ultra-rare diseases have learned to count-on Alexion to find and develop the cure for their conditions.
Q4 2011 Earnings Report
The success of Soliris has turned the drug into one of the major sources of revenue for the company. In 2011, sales of Soliris increased by 45% to $783 million. In the fourth quarter of 2011, net product sales increased by 46% to $227.6 million. Net income increased by 82% to $48.2 million.
The company reports that the strong uptake of New PNH patients taking Soliris continues. Soliris has also begun to be marketed in the US for the treatment of aHUS.
Dr. Leonard Bell recently gave a speech concerning the Q4 earnings report. He indicated that the company had reached three initiatives set out in 2011. These were: to continue the strong Soliris growth trajectory; FDA approval in September 2011 to use Soliris as treatment for patients with aHUS has enabled the company to reach its goals to serve these patients in the United States; all of the other drugs being developed for the treatment of other ultra rare diseases have progressed significantly.
Dr. Bell also stated that Alexion is currently on track to meet its growth targets for the current year and even for the rest of the decade. For 2012, the company intends to fully explore the potentials of Soliris in the treatment of other forms of ultra rare diseases. The company is currently testing Soliris on 4 other ultra rare diseases and would like to see these tests progress further this year.
Some other company highlights during the fourth quarter of 2011:
- A substantial number of new PNH patients from Canada, Australia, Japan, East Asia, and Europe were started on Solaris.
- FDA approved Soliris in the treatment of aHUS.
The success of Soliris in the market has lead to the stocks of the company soaring. The 52 week high is $95.01. Alexion is currently trading at $89.71. The 52 week low is $43.78.
Prices of the shares of stocks of Alexion increased when better than expected Q4 earnings report was released. Prices increased by 7% when the company released the Q4 report.
Alexion does not currently pay any dividends to its share holders.
Alexion expects that the net product sales to be around $1.04 to $1.07 billion. Research and Development expenditure are expected to be at $220 to $230 million.
Rigel Pharmaceuticals, Inc. (RIGL)
Rigel regained the rights to R343 from Pfizer. Pfizer made a decision to leave the respiratory disease niche within its clinical development program. Rigel is cash rich and is on full course in developing its new products.
Celgene Corporation (CELG)
Celgene would be the ultimate acquisition. Celgene is growing earnings and revenues in the 20% range. The company is focused upon products to treat cancer and immune inflammatory related diseases.
Pfizer needs to put some chutzpah in its business model. The company is more than a cash cow. This will take an accretive to earnings acquisition. The companies are out there.
Pfizer needs to put a glide back in its stride and take appropriate action. Revenues equate to earnings. Higher earnings equate to higher dividends. No action is an action. The old Pfizer clearly would make an accretive acquisition. The company needs to get back on the growth strategy versus the cash cow business model.
Disclosure: I am long CELG, ALXN.