Pfizer Setback: Disappointing, But Not Catastrophic

I was actually planning a broader pharmaceutical post today, but in light of the Pfizer (PFE) news over the weekend, I want to address that company a bit first.

My firm Peridot Capital has a small holding in PFE, and will not be selling into today's weakness. My bias would be to buy more, not sell. The news that the company is abandoning its lead cholesterol-fighting compound is hardly a positive development. However, despite losing a key drug in its pipeline, the reasons I like Pfizer have not changed dramatically with this news.

Pfizer still trades at the lowest multiple in the big pharma group. Investors can certainly argue that such a price is warranted given the issues with their development pipeline, coupled with the fact that they are projecting flat revenues for 2007 and 2008. That said, once growth resumes in 2009 and beyond there will be outsized upside potential with such a depressed stock price. The bar will be set quite low when business begins to turn.

The stock is down more than 10 percent today to $24 per share. The current $0.96 annual dividend puts the stock's yield at around 4 percent. I would expect a dividend increase to be forthcoming. A boost of 15% or more (to at least $1.10 per share) equates to a 4.6% yield, which is more than that of a 30-year U.S. treasury bond.

A floor on the stock due to the large dividend is not the only reason the shares are attractive at $24. Investors should expect accelerated cost cutting measures by management, increased share buybacks to appease upset investors, as well as an increased focus on M&A to boost their product pipeline. These moves will be received well on Wall Street, as they will allow the company's earnings per share to hold up well (and even grow) for the next couple of years until new products can fuel larger growth in the drug business.

With the stock yielding 4 percent and trading at 12 times earnings, the downside for PFE is limited. Don't get me wrong, this is a longer term play. The stock is not going to $30 overnight. However, the stock will pay you like a long-term bond while you wait for the picture to improve, and if some new blockbuster drugs do come to market over the next several years, there is no reason to think the stock could not reach the 40's again.

Add in the dividend payments and this defensive healthcare play could meaningfully boost portfolio returns over that time.

Disclosure: Author is long PFE

See also: Simply Tragic: Pfizer's Torcetrapib Cholesterol Drug Halted

PFE 1-yr chart:

Comments

[CrossProfit]

"I would expect a dividend increase to be forthcoming"

Not sure about this. PFE just took an 800M hit on its go it alone R&D.

“an increased focus on M&A to boost their product pipeline”

Agree. PFE will be looking now at bio acquisitions to shore up its pipeline. Take a company like DCTH that can be acquired for 90M including a 40% premium; add 40M (max) to complete the product and PFE has a new product for 130M with little to no risk. Likewise any late stage phase II with promising results is a safer way for PFE to proceed. The dividend will most likely remain as is until PFE knows how much cash it needs and how many bio's it will need to gobble up to fill its pipeline. Institutional shareholders do not need the dividends. They want to see a game plan preferably being implemented quickly.

Disclosure: Personal comment by a CrossProfit analyst and may not reflect the opinion of CrossProfit.com.
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[Ray Davis]

As of this moment you assume too much with this statement:

"once growth resumes in 2009"

Disclosure: No position