Pfizer: Buy Now On Strong Pipeline

| About: Pfizer Inc. (PFE)

Pfizer Inc. (NYSE:PFE) is on track with its 2012 guidance and had promising highlights in its recent second quarter earnings report. Recent news relating to an international investigation by the SEC, DOJ and FBI regarding Pfizer's subsidiaries have had positive undertones that outweigh the menial fines the company is going to have to pay to resolve the offenses. Pfizer recently announced the failure in clinical trials for an Alzheimer's drug, but also announced progress towards a treatment for rheumatoid arthritis. All of these events have positive implications in the long term. Shareholders should hold on to this stock for significant capital appreciation and adequate dividend payments. Interested investors should buy soon before Pfizer moves beyond its current resistance level.

During the previous three months and previous six months, the healthcare sector has been the top performer with its market price increasing by 6.2% and 8.1%, respectively. Over the past year, the healthcare sector performed second best behind the services sector, with its market price improving by 24.5% and 13.7%, respectively. Of the big five pharmaceuticals exceeding over $100 billion in market cap, Johnson & Johnson (NYSE:JNJ), Pfizer, Merck (NYSE:MRK), GlaxoSmithKline (NYSE:GSK) and Abbott Laboratories (NYSE:ABT), Pfizer has the second lowest price-to-earnings ratio. Pfizer's price to book ratio is around 2.14, this is the lowest of the five large pharmaceuticals. Meanwhile, it has the second largest market cap and the third highest dividend yield at around 3.69%, equating to $0.88 annually.

Pfizer's beta is around 0.7 and its gross margin is around 80%, these are highest among the five large-cap pharmaceuticals. Only GlaxoSmithKline has a higher operating margin that Pfizer, but its debt to equity ratio is 2.44 compared to Pfizer's 0.4. Pfizer's current ratio is around 2 and its quick ratio is around 1.75, both of which are higher than Johnson & Johnson and GlaxoSmithKline. In 2012, through the first week of August, Pfizer's stock increased by around 13%, trailing only Merck's 19% and Abbott's 20% increase. However, Pfizer has a higher operating margin than both Merck and Abbott by more than 100 bps and 400 bps, respectively. These large caps are all less than 200 bps beneath their 52-week high and Pfizer's currently available at nearly 50% to 33% the price of the other four.

Much of the revenue loss on the recent earnings report was expected due to the loss of exclusivity from Lipitor and other patents. In the second quarter, revenue was almost $15.1 billion, which was a 9% decrease year-over-year YOY. In the first half of 2012, revenue was almost $30 billion; this was an 8% decrease YOY. Reported net income increased by 25% in the second quarter and by 4% for the first half of 2012. The earnings report did reaffirm the 2012 guidance of $58 to $60 billion in revenue, with 19.5% to 20.5% relegated for cost of sales, $6.5 to $7 billion for R&D expenses and around $19 billion in operating cash flow. Cost of sales decreased by 23% in the second quarter and by 22% in the first of half of 2012 due to the reduced manufacturing volumes from lost exclusivity, cost-reduction and productivity initiatives in conjunction with streamlining the manufacturing network and a favorable currency impact of 8% in the second quarter and 6% in the first half of 2012.

Cost of sales as a percentage of revenue decreased by over 3% YOY to 18.3% in the second quarter. R&D expenses decreased by around 24% in the second quarter and by 13% in the first half of 2012 YOY due to the discontinuation of certain R&D divisions in line with Pfizer's cost-reduction and productivity initiatives. On aggregate, operation factors cut revenue by 6% and negative currency impact by 3%. U.S revenue decreased by 15% due to the loss of Lipitor exclusivity and international revenue fell by 5% due to negative currency impact. The only place Lipitor sales increased was in emerging markets; even with negative currency offsetting earnings, this revenue increased by 15% in the second quarter and by 5% in the first 6 months of 2012. Losing Lipitor exclusivity cut Pfizer's total revenue by $1.4 billion in the second quarter and by 2.3 billion in the first half of 2012; Lipitor sales dropped by 78% in the second quarter.

The imperative aspect of recent news about Pfizer paying $15 million to the DOJ and around $26 million to the SEC is that this was a self-reporting issue. There are not any criminal charges and Pfizer found these offenses through its own investigation within six months of acquiring Wyeth. This happened back in 2004 and was strictly happening in the emerging markets divisions, not in the U.S. This does not really hurt Pfizer as much as it shows its transparency in the past and looking forward as well. Pfizer worked diligently with the DOJ and SEC and agreed to implement a variety of measures to enhance compliance and establish more monitoring on global operations. This includes increased due diligence for future acquisitions, strengthening its internal anti-corruption program and monitoring relationships with foreign physicians and government officials. This is good news for current shareholders as Pfizer can improve organically from this event.

Pfizer recently ended development of an Alzheimer's treatment from bapineuzumab intravenous. The decision came after the second failure in clinical trials within the past few weeks. This is Pfizer's second attempt at a treatment to mitigate Alzheimer's. There will be many industry failures before successful development; this is a lucrative endeavor as over 30 million have dementia, and over 5 million currently suffer from Alzheimer's, and this may increase to 16 million by 2050. However, Pfizer recently had success in Phase III of its tofacitinib trials for moderate to severe rheumatoid arthritis; the new data goes to the FDA in mid-August. Rheumatoid arthritis affects 1.3 million in the U.S and over 23 million worldwide. Pfizer's tofacitinib would be the first JAK inhibitor and it is currently being reviewed by regulatory authorities in America, Europe and Japan.

Pfizer is focusing on its core functions by divesting its nutrition business and creating an IPO for 20% of its animal division in 2013 so it can focus on developments in its product pipeline. As of May 2012, Pfizer had 87 products in its pipeline with 20 in Phase III and 33 in Phase II. I believe the stock will rise in the near term as it meets with more success with products in its pipeline and continues to improve organically.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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