A Fat Yield at Pfizer

With a dividend yield hovering around 7% and a recent deal with Indian generic drug maker Ranbaxy to delay a copycat version of the world's best selling drug Lipitor (with $12.7 billion in 2007 sales) for over one year until late 2011, shares of Pfizer (PFE) merit a buy below $18 per share for both income investors and those seeking a safe haven investment during the current bear market.

The deal with Ranbaxy to delay generic competition for Lipitor provides Pfizer with more time to develop and acquire follow-on blockbusters for what will be a loss of patent protection to the Company's best-selling drugs beginning in late 2011 with Lipitor, which accounts for about one-quarter of total sales.

New drugs that are receiving a favorable response from the market include cancer drug Sutent and the anti-tobacco pill Chantix. In addition, Pfizer recorded $2.6 billion in sales during 2007 from the animal health segment, making it one of the top players in this healthcare niche, which faces much less competition versus its human counterparts.

Pfizer reports that Chantix has already been used by over 5 million people worldwide and as a retail pharmacist I have witnessed its popularity and buzz factor first-hand. Many patients have reported success at quitting their smoking and chewing tobacco habits within a few months or less of starting Chantix.

Chantix got off to a slow start after launch, but sales have ramped up exponentially and the drug has better insurance coverage at present, as more health plans realize the long-term health benefits and cost savings of getting their patients to kick their nicotine habits. Even without insurance coverage, many patients are willing to pay around $120 for a one-month supply or roughly $4 per day for Chantix as the cost of cigarettes and chewing snuff has skyrocketed in recent years and add up significantly over years of regular use.

Despite recent reports of erratic behavior in a few patients taking Chantix and the possibility for sleep disturbances and/or vivid dreams, most people taking the drug report few, if any, side effects. Also, the prescribing habits of practitioners in my area have changed noticeably in the last year, and now rarely include prescriptions for bupropion or nicotine replacement products as Chantix appears to be the dominant player for putting an end to nicotine addiction.

With FY07 revenues of $48.6 billion for Pfizer, Chantix currently represents less than 2% of total sales ($883 million during 2007). However, the drug is poised to exceed the $1 billion blockbuster milestone shortly and represents a successful launch and source of future sales growth for Pfizer.

Pfizer is committed to maintaining its dividend, with expected cost savings for 2008 expected to total $2 billion and cash flow from operations of at least $17 billion in 2008, up from just $13 billion in 2006. The Company has over $28 billion in cash and repurchased $10 billion worth of its own stock in 2007, with another $5 billion authorized for the current year. Revenues are expected to come in between $47 and $49 billion during 2008 with R&D expenses of about $7.5 billion, resulting in an expected EPS range of $2.35 - $2.45.

Despite valid concerns of patent losses beginning in late 2011, Pfizer represents a buy below $18 while yielding over 7% as the Company has adequate time and cash to bolster its late-stage pipeline through acquisitions of small and mid-cap biotech and pharma companies with promising new drug candidates. Pfizer also represents more than 6% of the total holdings in the following widely-held exchange-traded funds: Pharmaceutical HOLDRS (PPH) - 15.6%, Healthcare Sector SPDR (XLV) - 9.9%, iShares Dow Jones US Healthcare (IYH) - 8.3%, and iShares S&P Global Healthcare (IXJ) - 6.1%.

Comments

[MagicDiligence:]

Great review Mike. Pfizer indeed looks attractive at today's prices, which are a nearly 11 year low. The 7% dividend is in good shape, payout on free cash is 80%, which is high but sustainable, particularly if Pfizer executes some share repurchases. Nice to have your insider views on Chantix as well.

Steve
magicdiligence.com

2008 Jul 15 11:16 AM

[ladylily:]

Pfizer is a great buy here. A 7% dividend, good value and good growth potential. And it's buying back its own stock, a sure sign of optimism on the part of the company. I'm buying!

2008 Jul 15 03:06 PM

[BioInvestor:]

I agree that Pfizer is looking good right now--I expect the stock to get cheaper--I don't agree that the company has time to bolster its pipeline through acquisition in time for the loss of Lipitor.

In the emerging pharma sector, there are some remarkable values out there: there are many drugs in Phase II and late Phase III with companies that are not flush with cash. Many of these drugs are, unfortunately, already partnered, but there are still many opportunities for PFE. I expect the company to either continue merging into these smaller companies or to license pipeline through other deals. I am concerned that there won't be time to replace the loss in revenues from Lipitor in a few years; however, I believe that, for the most part, this loss in revenue is already priced into the stock.

I bought some Pfizer recently, but I am waiting for it to get closer to $15.

2008 Jul 16 02:23 AM

[BioInvestor:]

I'll throw one more suggestion into the mix. It's a little unconventional, but could make for an interesting point of discussion. If I were the CEO of Pfizer, I'd look into the concept of lobbying the FDA to have Lipitor go OTC when it comes off patent.

Now, I recognize that there are some serious adverse events associated with Lipitor--they need to be taken seriously. I also think that, from a public health perspective, there is a valid argument to be made to having statins more readily available without a prescription. To some extent packaging that would limit availability could mitigate problems with Lipitor, but certainly wouldn't entirely eliminate the risk of problems with the drug.

I throw this idea out because, from a marketing perspective, Pfizer would be in a much stronger position if it competed with prospective sellers of Atorvastatin using its Lipitor brand name. It obviously will still do it when the drug is off patent, but it will also have to contend with more people in the decision making process when it comes to which version of Atorvastatin to prescribe. I think that if the drug were OTC, Pfizer just might keep a larger fraction of its current market share if it were to compete more directly on the brand name.

Truthfully, I don't expect to see Atorvastatin to go OTC and I don't think Pfizer would push to make it happen. It’s just an interesting idea to ponder!

2008 Jul 16 02:38 AM

[Mike Havrilla:]

Could also lobby FDA make the statin drgus such as Lipitor available in low doses as a new "3rd Class of Drugs" available only after consultation with a pharmacist. Already sell Plan B emergency contraceptive and pseudoephedrine-contai... products behind-the-counter only. Prilosec OTC is a very good example of successful switch to OTC for a former Rx-only brand drug that would otherwise have very low sales now due to generics.

Check out this article for an overview:

www.medscape.com/viewa...

2008 Jul 16 05:27 AM

[Mike Havrilla:]

Sorry, the link above didn't work - Just Google "third class drugs" for more inffo on the topic

2008 Jul 16 05:30 AM

[paracelsus:]

Nice to have a post from someone with a pharma background for a change.

2008 Jul 16 12:34 PM

[BioInvestor:]

I think that's a clever idea. Pfizer has shown in the past that it is an excellent marketing machine. Even at a lower dose, PFE could still compete on brand rather than focus on price.

Agreed: Prilosec is an excellent example.


On July 16, mikehav wrote:

Could also lobby FDA make the statin drgus such as Lipitor available in low doses as a new "3rd Class of Drugs" available only after consultation with a pharmacist. Already sell Plan B emergency contraceptive and pseudoephedrine-contai... products behind-the-counter only. Prilosec OTC is a very good example of successful switch to OTC for a former Rx-only brand drug that would otherwise have very low sales now due to generics.

2008 Jul 18 06:14 PM