Pfizer (PFE) has been part of a growing Pharmaceutical Industry with good profits and dividends. There are signs of a lull in the bullish trend coming. This may not lead to a reversal pattern just yet, because the economic climate is still very healthy for companies with good dividends. But Pfizer does look like it is going to slow down, and recent bad press may contribute to a short term bearish trend. It may not be a large move, but with the charts showing a consolidation period approaching, it is a good time to take advantage of this with a short-term income play.
Delay of Generic Lipitor?
Five retailers joined a legal battle against Pfizer Inc., accusing the drug maker of using anti-competitive tactics to delay the introduction of competing generic copies of Pfizer's blockbuster cholesterol-lowering pill, Lipitor. This could be a public relations nightmare in a time when consumers are price-conscious, and Pfizer is accused of purposefully causing them to pay much more for a drug when they shouldn't have to. After it lost the Lipitor patent in December, a slew of competitive generic drugs ate into its earnings on the brand name. Walgreen Co., Kroger Co. Safeway, Supervalu and HEB Grocery all accused Pfizer and India's Ranbaxy Laboratories on Thursday of running an anticompetitive scheme to keep generic versions off the market until 20 months after the original patent expired. There are accusations that include, but are not limited to, things like price fixing agreements and sales deals with pharmacy benefit managers.
Centrum Qualities Over Exaggerated
The Center for Science in the Public Interest appears to have entered an agreement with Pfizer that will get the company to remove claims about breast health and colon health and change the wording on heart health and energy on the container. If the company is changing labeling and removing other claims, we have another public relations fiasco taking place. This brings up the question of whether it was involved in false advertising to begin with. Why would Pfizer bow to [CSPI], a public interest group? Obviously, Pfizer makes a statement of no wrongdoing and disagrees with the accusations raised by the group, but they will bow to them. The non-profit group threatened to sue the company if it didn't remove claims from the labels of various Centrum products that say they support "energy and immunity," "heart health", "eye health," "breast health," "bone health" and "colon health." Just the fact that it is changing so much looks bad for Pfizer.
These two recent and very public legal issues look like the consumer is the one getting taken advantage of. No doubt, it will contribute to the company's slowdown.
The Options Play
Looking at Pfizer's long-term weekly chart, I see a consistent pattern of rising and then consolidating before it goes up again. It looks like the stock is just headed into that consolidation pattern again. The stock is presently trading at 22.41, and it is not uncommon in this consolidation phase to drop two or three points. I am looking at the RSI indicator, and it is showing a slight negative divergence, which confirms the weakening of the bullish trend. I am looking at a Bear Put Spread here for an income play.
- Buy an October put with a strike of '22' (priced at $0.74)
- Sell an October put with a strike of '21' (priced at $0.41)
- Net Debit to Start: $0.33
- Maximum Profit: $0.67
- Maximum Risk: net debit
- Maximum Length of Trade: 4 months
Reasoning behind the Trade:
- Negative news is not a positive catalyst for the company in the short term.
- Negative divergence in the RSI indicators a weakening bullish trend.
- I believe a short term pullback is imminent, with the continuous pattern it has been in.