Pfizer: Don't Overlook This Big Pharma Value Stock

On Thursday morning, at the drug maker’s annual shareholder meeting, Pfizer Inc. (PFE) Chief Executive Jeffrey Kindler said that his plan is to drive greater shareholder return. Kindler said that in 2007, the company took significant action to better position Pfizer to meet growing challenges and seize opportunities in the global marketplace for healthcare, while adding that “we are far from done – and our progress is not yet reflected in the share price.”

To say that Pfizer has encountered some difficulties would be an understatement. The stock price has suffered greatly, dropping 11.7% year to date and is off 38.6% from its 52-week high of $27.73 to recently trade at a new low of $19.79. As Avery Johnson outlined in a piece in yesterday’s Wall Street Journal, Pfizer’s prolonged troubles range from the

halting of a top drug prospect torcetrapib after a safety concern, eliminating a potential revenue replacement when anticholesterol blockbuster Lipitor faces generic competition as soon as 2010 to dismal sales of insulin inhaler Exubera, a product…once touted as a $2 billion-a-year product.

Yet, there is some reason to be optimistic.

To combat this, aggressive cost cutting measures are in the process of being implemented which could perhaps help prevent the stock from sliding even further while the company builds up its future pipeline, especially given its ultra-low valuation. In Pfizer’s latest earnings conference call on Apr. 17, management affirmed that it was on track to decrease total costs by at least $1.5 billion to $2 billion by the end of 2008. The savings, will in part come from layoffs, or what the company calls “matching workforce level with market reality.”

At the end of 2006, the company had 98,000 employees but by the start of 2008, that total had been reduced to 86,600. So far this year, 1,600 additional jobs have been slashed. But it doesn’t end there. Pfizer also expects to reduce the number of manufacturing plants and has identified numerous outsourcing opportunities. The cost cutting initiatives will pay off to some degree. The company reported first quarter income of $2.8 billion, an 18% decrease from the prior year, or $.61 per share below the consensus of $.66 per share along with disappointing Lipitor revenue of $3.1 billion, a decrease of 7% from a year earlier. The company says it will begin to recognize some of the benefits associated with its cost cutting strategy, which will help it hold the line on its full year guidance.

It is keeping full year diluted earnings per share at a range of $2.35 to $2.45. Looking out over the next fiscal year, earnings are supposed to grow to $2.54 per share, the analyst consensus estimate of growth of 7.2%. Sure, Pfizer has had its share of problems and the pipeline story is currently far from scintillating, but with the stock trading at a forward P/E of 8.39 and sporting a dividend yield of 6.50%, the drug maker shouldn’t be overlooked.

Comments

[NormanLepoff, M.D.]

At least this CEO did not lie about anything prior to the earnings release like BSC, WB and GE did.

[bryanz]

That 6.5% div is very appealing but PFE is still in "falling knife" territory. My hands have been cut before. Have they made statements concerning the dividend? Is it in danger?
No blockbusters in pipeline, lack of news on the acquisition front. PFE could be dead in the water for a while.

[wallyo35]

While the company stock prices have been plunging my DRIP is being resuscitated to make up for some of the difference in "dollars lost" overall. The company dividends are enough to keep this investor satisfied until any future "DRIP DROP" makes me nervous.

[ajhough]

I still have a position in PFE; however, it has been "dead money" for ten years. When I bought this stock, PFE didn't offer much, if any, dividend but now yields about 6.5%. It has acquired many other companies and relied on their research for new drugs. I don't see much ahead for this company nor stock.

[BioInvestor]

I think that bryanz is saying something that a lot of people must be thinking; however, I don't believe that the PFE dividend is in danger. At least if the board decided to cut the dividend, they'd be well aware of the potential ramifications:

1. Pfizer has raised the dividend pretty consistently for forty-three years: that's long before Barak Obama entered grade school. It could be longer, but that's all the information I found. Such behavior drives expectations. I think that if Pfizer were to change its dividend policy, we’d signals from the company.

2. PFE earns a lot of cash and has to do something with it. The company has engaged in a stock buyback program: that's great, I tend to love that kind of thing. However, with a dividend, a stable dividend, there are models that pretty much assure a price-floor for the stock price. We're pretty close to that price now. PFE has to spend its cash in some fashion--too much unencumbered cash on the balance sheet is a dangerous thing. Dividends is the way to go. PFE's cash isn't in danger yet--the company is buying more pipeline--as I see it, PFE could continue at the current dividend level for ten or eleven years without a problem.

3. Finally, I will repeat the signaling issue. Dividends signal stability. Cutting or eliminating dividends signal problems. Annual dividend raises drives expectations. If those expectations aren't met, there's the risk that even the biggest PFE cheerleaders would turn bearish. I have to believe that PFE knows that reducing or eliminating the dividend would seriously impair investor confidence in the company.

[BioInvestor]

I liked ajhough's comment, but I think that pessimism isn't justified. In fact, IMHO, in real terms, PFE is the best long-term value that it has been for over fifteen years.

First off, with the exception of, possibly, Genentech, every major company in this space is facing problems. There's nothing unique to Pfizer here, though Pfizer is, arguably, the best value.

Next, what happened to pharma in the 90s was exceptional. A number of things occurred to accelerate share price growth that won't occur again. Direct to consumer marketing created a new avenue of demand that didn't exist before. There were a slew of new targets--particularly in cardio vascular--that led to the development of many new drugs. Finally, FDA user fees, introduced in the mid-90s, meant a sudden rush of approvals from about 96 to 98 which distorted reality a little. The 90s have created an unrealistic expectation of the returns that a pharma company should generate.

Today, things are admittedly bleak. The safety bar has been raised high--too high in my opinion. For example, if Aspirin were discovered today, based on its safety profile, it wouldn't receive marketing approval from the FDA. Also, think of a drug like Lipitor and how high it has raised the bar for efficacy. Today, a drug in most markets has to have a safety profile and a level of efficacy that is quite daunting: certainly more challenging that in the 90s. Couple this issue with the fact that the cost to bring a drug to market--currently reported to be around $800 million--means that major pharma and biotech companies only deem a candidate successful if it can be a blockbuster--reaches $1 billion or more in annual revenues. That's challenging and there are few new molecules that can meet this goal.

There's nothing unique to Pfizer in these issues. What is unique to Pfizer is the level of cash and the ability to bring drugs to market. Talk anyone in the business development function in an emerging (usually called "biotech") company, and Pfizer usually heads the person’s wish list of major companies with which to collaborate. Pfizer has demonstrated that it can market drugs. Pfizer is also, pretty aggressively, searching for new drugs among the hundreds of emerging companies.

What Wall Street refers to as biotech got a nice injection of cash towards the end of the dot.com bubble. Those funds were used to build pipeline. If you analyze such emerging companies today, the pipelines are healthy. Even better, talk to people in the outsourcing industry: the Cambrex, Lonza's, DSM's of the world--pilot plants are full. Emerging companies appear to have many drugs in phases I and II; however, when you check the balance sheets of such companies, there's simply not enough cash to run meaningful Phase III trials. Over the next twelve to twenty-four months, I expect to see a major transfer of pipeline from emerging to legacy pharma in the forms of merger or marketing collaboration. It's started already. Pfizer has the most cash--and, frankly, the most clout to buy a pipeline.

Though it hasn’t been stated in posts here, the 90s isn’t really a good point of comparison for pharma companies; the experiences then I think warped our expectations for returns in the industry. Major pharma will buy or license pipeline from emerging companies. Based on cash and cash flow, Pfizer is in the best position to bolster its pipeline.

Sure Pfizer has problems, but I am pretty sanguine on the company and its long-term prospects. When it comes to pharma, Pfizer is the best of a bad bunch.

[CaptainAristid]

Bioinvestor provided fantastic information and I was wondering if there were any thoughts on the impact of the upcoming presidential election on pharma in general and Pfizer in particular. If government mandated universal health insurance were to come to pass, I have a tough time evaluating its impact on the industry.

[BioInvestor]

Sorry I missed your post.

It's difficult to say what, if any, impact there would be on the pharmaceutical industry--or healthcare in general--with a government mandated program. At the most cursory level, the plan would involve bringing more people into the healthcare system, not fewer. At first blush, that would appear to be a positive move.

Of course, you can't talk about government involvement without a discussion on price controls. The pharmaceutical industry is an easy target. Drugs make up about 10% of the entire healthcare spend--that fraction has been stable for some time. While I am sure there are ways to reduce costs, I wouldn't necessarily focus on pharma first.

For me, there's an obvious and potentially much more effective way to influence both prices and general health in the system: how it’s funded. Right now, health insurance is, to a large extent, selected and subsidized by our employers. Our health insurance is attached to our jobs. Americans change jobs, on average, somewhere between every three and four years. A change of jobs will almost certainly mean a change in insurance carrier--certainly a change in the plan. There's no real incentive for an insurance company to focus on long-term or preventative measures. Basically, the company only jumps in when we’re sick and then tries to minimize what it pays to get us well. (I am exaggerating a little here, but strictly for effect—and affect too!)

I'd like to see things changed. Employers could still reimburse, but I suggest structuring health insurance like life insurance. You enter a contract, say, in your twenties. There'd probably have to be some regulation, but the contract could stipulate the life changes that could trigger a change in rates: if you marry, have kids, take up hang-gliding or deep-sea diving, etc. With a long-term relationship, there's a much bigger incentive for insurance companies to make sure you are healthy and, if you get sick, making sure you get health ASAP: heck, I'd agree with raising premiums if people put on weight or take up smoking. The contract would stipulate how premiums could change. I do think that there would likely have to be some sort of regulation or oversight to make sure everyone is playing fair. Companies would probably insist on regular check-ups. They may even elect to pay for those diagnostic tests that can portend future problems, tests for illnesses like, say, haemochromatosis, that are currently not covered.

There are obvious concerns with the approach--for example, what happens if you lose a job and can't pay the coverage. Perhaps, there could be a prepayment mechanism--similar to how mortgages are handled. Maybe there could be a mandated insurance to cover those that cannot afford to pay.

I am throwing out a general concept here, not a detailed plan. There are issues in creating such a program, as insurance is regulated at the state level. The system would have to accommodate people moving round the country from job to job. I do think that the current system of covering healthcare is silly.

The change I am suggesting doesn't affect the non- or under-insured. I think it's a better idea than the current way we pay for healthcare. It could lead to a more collaborative relationship with the insurance carrier--at least the battles would be about staying healthy.

It’s a long answer to your short question, and I changed topic on you too, but I think that change in the system is needed. A change in how it’s financed is. IMHO, a step in the right direction.



On Apr 28 10:51 AM Captain Aristid wrote:

> Bioinvestor provided fantastic information and I was wondering if
> there were any thoughts on the impact of the upcoming presidential
> election on pharma in general and Pfizer in particular. If government
> mandated universal health insurance were to come to pass, I have
> a tough time evaluating its impact on the industry.