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An Industry Giant Re-Adapting to a New Scenario
Posted by: Vanina Egea (IP Logged)
Date: February 26, 2014 06:18PM
The pharmaceutical industry is a dynamic market, where the need for investment in new developments and generic competition, mark the path for major manufacturers. Pfizer Inc. (PFE) is a firm with an outstanding portion of prescription drug’s sales (reaching up to 90%), and a large share of the pharmaceutical market, making it an industry leader. Pfizer enjoys a wide moat, based on its capacity to diversify fields of operation, secure high levels of cash flow and financial strength for the development of new drugs, and finally due to its sales ratio in emerging markets.
New Opportunities, New Challenges
The pharmaceutical industry involves various fields and Pfizer has expanded its opportunities by investing resources in cardiology, oncology, neuroscience, metabolic disorders, immunology, inflammation, and vaccines. In this regard, the pharmaceutical giant has acquired two new patents: Lyrica and Wyeth, which are worthy of consideration. Wyeth has developed a profitable business model in emerging countries, while maintaining a considerable market share in the United States. Pfizer will thus benefit from the purchase, especially since the company is constantly looking for alternatives to the European market. Austerity measures in the old continent are threatening prices, and taking a toll on the firm’s sales.
Besides the increase in the number of collaborative agreements with competitors like Merck & Co Inc. (MRK), which increases benefits from expanding to Eastern and Central Europe, Pfizer has expanded its pipeline with the approval of Xeljanz, Xalkori and Lnlyta by the FDA. The firm has made significant cost reductions in the R&D sector, affecting revenue versus net income tendencies positively. These measures contribute to major levels of cash flow and a more solid financial position.
Although Pfizer has strong levels of growth and profitability, there are challenges to its commercial strength. The patent loss of Lipitor, Norvasc, Celebrex, Protonix, Zoloft, and Camptosar, had a negative impact on revenue. In addition, the expiration of the Spiriva and Enbrel agreements add tension to the alliance benefits.
Drivers & Ratios
Pfizer offers an exciting P/E ratio, reaching 8.7 compared to a surprising high 28.4 industry average. At the same time, return ratios such as ROC and ROE show the firm has managed their capital well, leading to strong returns compared with its competitors. The firm also boasts an operating margin of 20.5%, compared to the industry average of 9.5% and has demonstrated a tendency towards debt reduction. I think that returns on investment and ample operative margins in different fields indicate stability in valuation and sustained cash flow.
Regarding dividend capacities, Pfizer reveals a considerable annual dividend yield of 3.12% compared to competitors’ average of 1.38%. Given the mentioned conditions, and considering the firm is trading near its 52-week-high, I feel quite bullish regarding Pfizer.
Investment gurus aren’t uniform regarding Pfizer, and as Vanguard Health Care Fund (Trades, Portfolio) has decreased its participation by a 43.19%, Jean-Marie Eveillard (Trades, Portfolio) has increased it by 23.07% and Joel Greenblatt (Trades, Portfolio) by 241.71%. In this respect, I feel optimistic regarding the stability of Pfizer in the industry, especially considering its wide moat and the growth of the pharmacological industry in emerging economies. Share purchase could be a good business in the short term given financial strength and dividend tendencies.
Disclosure: Vanina Egea holds no position in any stocks mentioned.
Guru Discussed: Jean-Marie Eveillard: Current Portfolio, Stock Picks
Joel Greenblatt: Current Portfolio, Stock Picks
Stocks Discussed: PFE, MRK,