Pfizer (PFE, Financial) is one of the biopharmaceutical companies hardest hit by drugs losing patent exclusivity. Other big pharmaceutical companies affected by loss of patent protection include Merck (MRK, Financial), Johnson & Johnson (JNJ), Novartis (NVS, Financial) and Sanofi (SNY, Financial). Apart from battling with the loss of revenue due to loss of marketing exclusivity of their drugs, these companies are also packing drug pipelines to offset imminent patent expirations.
While many investors may not have considered investing in Pfizer after the company lost its patent protection for its blockbuster drug, Lipitor, yet Pfizer has preserved its bottom line despite the patent cliff, exceeded analysts’ estimates in three of the last four quarters and the company is currently showing signs of growth that should not be ignored by value investors. Here are a few key reasons to long the biopharmaceutical giant.
Pfizer’s Net Income Growth Is Increasing Leading to Increase in Its Operating Margins
Net incomes and operating margins of a company give some insights into its financial health. Pfizer’s net income growth has accelerated this year. In fact, when compared with its direct competitors like Merck, Novartis, and Sanofi, the rate of increase of net income growth trailing twelve months (TTM) is greatest at Pfizer with $10.68 billion followed by Novartis with $9.37 billion while Merck and Sanofi lagged behind with $4.53 billion and $4.05 billion respectively. Really, rather than increasing, there has been a decrease in Merck’s and Sanofi’s net incomes this year which should be a source of concern for investors. A healthy operating margin shows that a company is earning more per dollar of sales and, hence, able to pay for its fixed costs including interest on debt.
Pfizer’s 3-Way Split Plan Could Make It Grow Lean, More Profitable, and Move Its Stock Higher
With effect from 2014 fiscal year, Pfizer plans to split itself into three distinct businesses with separate financials. The company plans to have the three distinct units operate with excellence inside Pfizer, a move ISI Group analyst, Mark Schoenebaum, described as a clever one. According to Schoenebaum, the three-way split could give ‘’ …investors more clarity…’’ which in the process could allow them ‘’…to do a true sum of the parts.’’ The analyst added that one of the three businesses could eventually command a high price/earnings ratio of 20 or more, which is currently typical of biotech stocks. When Pfizer’s price/earnings ratio begins to increase, it should invariably add value to Pfizer’s shareholders by way of increases in its stock price.
Huge and Potentially Viable Drug Pipeline
Pfizer is looking to beef up income in the wake of the patent cliff and as at Nov. 8, it has an array of developmental backlog with 26 drugs currently undergoing phase 3 trials or under the review of the FDA. From all indications, it isn’t looking as if Pfizer will disappoint with the massive new drug projects at its disposal. Therefore, investors should begin to focus their eyes on Pfizer’s drug pipeline as it continues to develop because it has the potential of making the company standout from the competition in 2014 and going forward. Besides, Celebrex, Lyrica, Inlyta and Xalkori which were the strongest revenue growth drivers for Pfizer last quarter with 13%, 11%, 186% and 92% growth rates respectively are still relevant going forward.
Analysts’ Consensus Position on Pfizer
Thirteen analysts including those at TheStreet, Thomson Reuters/Verus, Goldman Sachs, J.P. Morgan, Barclays Capital, Morgan Stanley and Argus Research are optimistic about the performance of Pfizer going forward and, hence, reiterated a consensus buy recommendation at an average target price of $31.78 per share. Last Wednesday, analysts at Goldman Sachs removed Pfizer from Goldman’s conviction buy list (CL) where Pfizer has been since Aug. 9, 2011, and placed it on the buy list but raised its price target from $34 to $35 per share. Jami Rubin, an analyst with Goldman Sachs, claimed that Pfizer has gone up by 82.5% since being added to the CL as against 53.9% for the S&P 500 during the period and, therefore, there was the need to replace Pfizer with AbbVie at a price target of $60 because they claimed AbbVie has greater upside at this time.
Pfizer’s Valuation Metrics
Pfizer is currently trading at price/earnings (P/E) ratio of 8.87 and at a forward P/E ratio of 14.02. The company’s cash position of $33.7 billion - with equivalents and short term investments – as at last quarter is quite good, although Pfizer also has a net debt position of $2.8 billion.
At a book value of $11.84 per share and with a dividend yield of 2.99%, I strongly believe that Pfizer is a value company that is currently trading at a discount compared to its intrinsic value.
Conclusion
Pfizer is a giant biopharmaceutical company. The company discovers, develops, manufactures and sells its pharmaceutical products globally. Pfizer began to experience a gaping hole in its top line when it lost patent protection for Lipitor, its cholesterol treatment drug. Lipitor was Pfizer’s global top-selling drug before the loss of its patent exclusivity in November 2011. Lipitor generated $13 billion in peak sales for Pfizer in 2011 fiscal year, but that has since declined to $533 million as at last quarter which represent 29% year over year loss in sales.
However, by using a combination of costs cutting, job cutting, reordering its focus, reduction in expenses for research and development, divesture of its business units and using some portion of the proceeds for share buybacks, Pfizer has been able to grow its earnings per share (EPS) by triple digits in the last two fiscal years meaning that the company remains financially viable despite a decline in revenue. This year, Pfizer outperformed the market slightly with 27% modest gain in its stock price and if the company continues with the record of its lofty sales into 2014 as it continues to grow its blockbusters, investors should expect to see a bright future for Pfizer. Pfizer is a buy.
While many investors may not have considered investing in Pfizer after the company lost its patent protection for its blockbuster drug, Lipitor, yet Pfizer has preserved its bottom line despite the patent cliff, exceeded analysts’ estimates in three of the last four quarters and the company is currently showing signs of growth that should not be ignored by value investors. Here are a few key reasons to long the biopharmaceutical giant.
Pfizer’s Net Income Growth Is Increasing Leading to Increase in Its Operating Margins
Net incomes and operating margins of a company give some insights into its financial health. Pfizer’s net income growth has accelerated this year. In fact, when compared with its direct competitors like Merck, Novartis, and Sanofi, the rate of increase of net income growth trailing twelve months (TTM) is greatest at Pfizer with $10.68 billion followed by Novartis with $9.37 billion while Merck and Sanofi lagged behind with $4.53 billion and $4.05 billion respectively. Really, rather than increasing, there has been a decrease in Merck’s and Sanofi’s net incomes this year which should be a source of concern for investors. A healthy operating margin shows that a company is earning more per dollar of sales and, hence, able to pay for its fixed costs including interest on debt.
Pfizer’s 3-Way Split Plan Could Make It Grow Lean, More Profitable, and Move Its Stock Higher
With effect from 2014 fiscal year, Pfizer plans to split itself into three distinct businesses with separate financials. The company plans to have the three distinct units operate with excellence inside Pfizer, a move ISI Group analyst, Mark Schoenebaum, described as a clever one. According to Schoenebaum, the three-way split could give ‘’ …investors more clarity…’’ which in the process could allow them ‘’…to do a true sum of the parts.’’ The analyst added that one of the three businesses could eventually command a high price/earnings ratio of 20 or more, which is currently typical of biotech stocks. When Pfizer’s price/earnings ratio begins to increase, it should invariably add value to Pfizer’s shareholders by way of increases in its stock price.
Huge and Potentially Viable Drug Pipeline
Pfizer is looking to beef up income in the wake of the patent cliff and as at Nov. 8, it has an array of developmental backlog with 26 drugs currently undergoing phase 3 trials or under the review of the FDA. From all indications, it isn’t looking as if Pfizer will disappoint with the massive new drug projects at its disposal. Therefore, investors should begin to focus their eyes on Pfizer’s drug pipeline as it continues to develop because it has the potential of making the company standout from the competition in 2014 and going forward. Besides, Celebrex, Lyrica, Inlyta and Xalkori which were the strongest revenue growth drivers for Pfizer last quarter with 13%, 11%, 186% and 92% growth rates respectively are still relevant going forward.
Analysts’ Consensus Position on Pfizer
Thirteen analysts including those at TheStreet, Thomson Reuters/Verus, Goldman Sachs, J.P. Morgan, Barclays Capital, Morgan Stanley and Argus Research are optimistic about the performance of Pfizer going forward and, hence, reiterated a consensus buy recommendation at an average target price of $31.78 per share. Last Wednesday, analysts at Goldman Sachs removed Pfizer from Goldman’s conviction buy list (CL) where Pfizer has been since Aug. 9, 2011, and placed it on the buy list but raised its price target from $34 to $35 per share. Jami Rubin, an analyst with Goldman Sachs, claimed that Pfizer has gone up by 82.5% since being added to the CL as against 53.9% for the S&P 500 during the period and, therefore, there was the need to replace Pfizer with AbbVie at a price target of $60 because they claimed AbbVie has greater upside at this time.
Pfizer’s Valuation Metrics
Pfizer is currently trading at price/earnings (P/E) ratio of 8.87 and at a forward P/E ratio of 14.02. The company’s cash position of $33.7 billion - with equivalents and short term investments – as at last quarter is quite good, although Pfizer also has a net debt position of $2.8 billion.
At a book value of $11.84 per share and with a dividend yield of 2.99%, I strongly believe that Pfizer is a value company that is currently trading at a discount compared to its intrinsic value.
Conclusion
Pfizer is a giant biopharmaceutical company. The company discovers, develops, manufactures and sells its pharmaceutical products globally. Pfizer began to experience a gaping hole in its top line when it lost patent protection for Lipitor, its cholesterol treatment drug. Lipitor was Pfizer’s global top-selling drug before the loss of its patent exclusivity in November 2011. Lipitor generated $13 billion in peak sales for Pfizer in 2011 fiscal year, but that has since declined to $533 million as at last quarter which represent 29% year over year loss in sales.
However, by using a combination of costs cutting, job cutting, reordering its focus, reduction in expenses for research and development, divesture of its business units and using some portion of the proceeds for share buybacks, Pfizer has been able to grow its earnings per share (EPS) by triple digits in the last two fiscal years meaning that the company remains financially viable despite a decline in revenue. This year, Pfizer outperformed the market slightly with 27% modest gain in its stock price and if the company continues with the record of its lofty sales into 2014 as it continues to grow its blockbusters, investors should expect to see a bright future for Pfizer. Pfizer is a buy.
