Pfizer: Seeking Alpha in Pharma

My view is that there is a strong case for major Pharma, even if its science is slow in delivery. The valuations and yield is great and the growth potential enormous - the twin intangibles R&D and supply chain (marketing) can and will deliver.   There are few areas where growth potential is huge and at the same time valuations compelling.  Big pharma in general and Pfizer (PFE) in particular is one such area.

Ultimately it comes down to considering whether a non research based pharma (generic) can survive. As time goes by, the marketing machine of big pharma will be an important asset for big pharma together with R&D.

Generic sellers will end up being low cost contract manufacturers for major pharma. If PFE decides to compete once Lipitor goes generic, it can; with their marketing, the Ranbaxys of the world will not stand a chance unless they work with big pharma on the contract manufacture side. Generics manufacturers have nothing by way of an entry barrier and they cannot compete on sheer resource and scale. Even on the product, the correct cocktail is better than only the active ingredient; so one could argue that PFE will make the best “generic” Lipitor!

Humans have such a desire to live in perpetuity, be it through life extensions or reincarnations. An industry which tries to satisfy the human quest for immortality must succeed.The growth opportunities in the pharmaceutical industry lie outside the US. That is where the human quest for immortality is at its earliest stage.

Pfizer's immediate problems are:

(a) Science - Pfizer needs to move away from synthetics and into biologic, genetic, stem cell solutions - unlike synthetics, as these latter areas are less prone to patent disputes. They can build this pipeline in house, in-license it or acquire it. More than a pipeline, I feel a high quality of earnings pipeline is what is required. Success from their existing pipeline will provide a catalyst to a higher multiple, but long term, refocusing on quality of earnings needs to be a priority. Synthetics is yesterday's game and it would be a shame to see Pfizer fall by the wayside because of failure to glimpse the future.

(b) Marketing - This is a big strength and it must be leveraged. With drug approvals taking so long, the time in market from patent filing is far lower than before, so making the most of the market is critical.  Using this intangible to compete with generics might be interesting.

(c) Financial - There is limit to how much US leverage can be used for share buy backs & dividends. There is a high cash build from overseas operations and ultimately the foreign cash needs to come back to the US and this will come at a tax cost. Since this cash is “trapped” outside the US, perhaps use for an acquisition of non US assets would be viable. I do feel use of a debased currency such as Pfizer’s shares or the dollar is a deterrent in planning an acquisition, but perhaps a stronger dollar will help. If this occurs, a reverse acquisition which inverts the group should be considered.  For now, I love the way PFE is using cash to in license drugs; this reduces both cost and risk. Together with significant investment in R&D, this will deliver growth.  The in licensing process is a very VC/PE investor format except that instead of acquiring an entity, what is being acquired is the entity's future cash flows, and since Pfizer has the domain expertise, chances of successful delivery of value is high.

d) Management - A visionary CEO supported by a strong General Counsel please. Patents need to be protected, but legal is a support service, not the core business.  Overall, I believe management is headed in the right direction, but it is more of a drift than a purposeful stride.  This needs to change.

Until the science delivers, there is no great catalyst. Absent a catalyst, I would look for a range of $14 to $25. A catalyst emerging would drive re-rating and multiple expansion. For now, the only catalyst is the pharmaceutical industry defensive characteristics, which together with the dividend should mean the stock should find near term support and trade upwards to $25-$30 range (including dividends).

Disclosure: Long PFE

Comments

[Michael Shu...:]

PFE has a $10-412 billion donut hole in revenues beginning sometime between November of 2010 and November of 2011. The Lipitor patent expires in 2010 and at the latest a generic version will be available one year later. The experience of Zocor, and other branded medicines coming off patent, widely used and not difficult to copy -- Prozac and Claritin come to mind - shows Lipitor will lose 75% or more of market share within 12-15 months of a generic hitting the market. That is roughly $9-$10 billion in revenue that in turn generates huge net profits. Barring some sort of magical acquisition -- nothing of size would currently be accretive - the stock is worth $8 in 2010/2011. It is being held up by the ultimate bribe - a 6.9% dividend. PFE is one of the good guys in the industry - these are serious, dedicated people -- but the stock price is unwarranted and will drift towards $8 over the next 2-3 years, propelled by the inevitable dividend cut. Anyone who thinks PFE can withstand the generic onslaught is being willfully blind - or can ask me for our survey data which shows how hard and fast Lipitor will fall to generic competition. It is a great drug -- I take it -- but insurers are already swtiching new and willing patients to generic Zocor, so the precedent is being set.

2008 Sep 22 08:23 PM

[beabaggage:]

Pfizer's biggest asset is it's huge cash hoard. Like Exxon, Cisco and so many other giants, this company wisely accumulated tens of billions of dollars for the depression we are entering. This will allow them to buy for next to nothing anything they darn well please, not to mention their borrowing power in the new corporate world order emerging. This is why they call them blue chips, folks.
Long, Buy!

2008 Sep 23 08:57 AM

[David in En...:]

A wise post from Shiv. Only Novartis currently use the generic arm in the way that Shiv suggests and they use it a a competitive weapon as much as anything. Even if Pfizer does decide to launch its own generic of Lipitor they are still going to have to face the loss of about $10B in topline and not much less in bottomline.
Becoming a biologics company with therapeutics vaccines may be the way of the future but it will not produce much in the next couple of years.
Given that we know likely sales, ebitda and dividends for the next 3 years, the share price is predictable. Currently however PFE is a safer place to park some money than certain banks.

2008 Sep 29 09:45 AM