The U.S. Food & Drug Administration (FDA) carries so much weight in the healthcare and pharmaceutical sectors that even the slightest indication of an approval or rejection can turn a $10 million dollar company into a billion dollar enterprise and vice versa almost overnight. With that said there has been one FDA move in the last 24 hours shareholders and potential investors should consider before investing in the pharmaceutical sector.
For potential investors looking to establish a position in the sector, one of the major pharmaceutical drug makers, Pfizer (PFE) received notice that the FDA has extended the action date of the New Drug Application (NDA) for PFE's drug tofacitinib. Tofacitinib is an investigational oral treatment for adults suffering from moderately to severely active rheumatoid arthritis. If approved, tofacitinib would be the first of its kind, in a new class of entitled Janus kinase inhibitors which are orally administered to treat rheumatoid arthritis. In my opinion this would set Pfizer apart from many of the companies in the space such as Abbott Laboratories (ABT) which currently develops Humira, the leading rheumatoid arthritis treatment that is administered through an injection.
What would an approval mean for shareholders and potential investors? It would mean the entrance into a marketplace where Humira generated $7.9 billion dollars in sales in 2011, and looks to surpass those sales numbers in 2012. If tofacitinib is approved, not only would Pfizer be able to enter the $7.9 billion dollar market currently cornered by ABT, it would make up for the significant ground which was lost when the company's cholesterol management drug Lipitor was allowed to be sold in generic form earlier this year.
In my opinion, the upside potential for Pfizer is pretty significant because not only will they be entering such a relatively untapped market, but if they can account for 20% of ABT's current sales through the presence of tofacitinib, that could potentially equate to an additional $1.58 billion dollars in annual sales, based on the 2011 full year sales numbers for Humira. The addition of tofacitinib to Pfizer's pipeline would certainly enhance the company's growth prospects, but investors should also keep in mind that Pfizer also possesses a great yield and is certainly worth a look from an income perspective as well. Currently yielding 3.70% and paying an annual dividend of $0.88/share, Pfizer is one the highest-yielding Dow components, and has increased their dividend at least once in each of the last four years.
Potential investors and current shareholders alike should consider establishing a moderate position Pfizer at current levels and ahead of the FDA decision with regard to tofacitinib. If approved, the drug will almost certainly make up for ground PFE lost when Lipitor went generic and shareholders also have the opportunity to take advantage of the company's solid yield. With analysts only expecting PFE to grow 4.5% next year, an approval of this magnitude could exponentially increase those numbers. It should be noted that PFE will announcing earnings on October 29th and is anticipating a PDUFA with the FDA on November 21st with regard to the NDA of tofacitinib.
Disclosure: I am long PFE.