Inside Wall Street: Should investors flee Pfizer?

Shares of the world's largest drugmaker wobble from negative news on the company's Alzheimer's drug.

By Gene Marcial Aug 8, 2012 1:48PM

Although Pfizer (PFE), the global leader among pharmaceutical companies, has been confronting numerous problems this year, the overall diagnosis for its stock continues to be upbeat. It's still one of healthiest Big Pharma stocks around, trading at one of the lowest price-to-earnings multiples in the group.


Pfizer and Johnson & Johnson (JNJ) were working on a drug, bapineuzumab, aimed at treating Alzheimer's disease. It carried the promise of becoming a blockbuster bigger than Pfizer's Lipitor, the best-selling cholesterol therapy. But first it had to pass the rigors of lengthy clinical studies. And it didn't. 


Pfizer and J&J have pulled the drug from further testing as it failed a critical Phase II clinical trial. Predictably, shares of the two major drugmakers tumbled, with Pfizer losing 2.4%, to $24.74 a share, and JNJ easing nearly 1%, to $68.29. Shares of another partner in the drug, Elan (ELN), also dropped, by almost 1%.


But don't be misled: Looking at the bigger picture, Pfizer's stock is still trading close to its 52-week high of $24.49. Ditto for JNJ, whose 52-week high is $69.75.


However, in Pfizer's case, there are still several reasons the stock could encounter more downside pressure this year. If it pushes back some more, investors should just regard it as another buying opportunity. Pfizer, undoubtedly, should be a core portfolio holding in pharmaceuticals for the long term, in spite of its near-term woes.


Topping the list of worries, even among the Pfizer bulls, is that the company faces tough sledding over the next two quarters. Here are several reasons:


Revenues may take a beating this year. S&P Capital IQ forecasts a sharp sales decline for 2012 -- by about 12% -- mainly reflecting the impact of rising generic competition to Lipitor, which generated sales of $9.6 billion last year. Pfizer's patent on Lipitor expired in November 2011.


In addition, Pfizer had to classify its nutrition unit, whose sales last year totaled $2.1 billion, as discontinued operations at the end of the second quarter of 2012 as it agreed to sell the business to Nestle for $11.8 billion in cash. Pfizer's sales are also expected to be hurt by the negative foreign exchange adjustments and by the expected lower sales in a number of other off-patent drugs.


Pfizer's margins are part of this year's problems, "which is largely reflecting a less-profitable sales mix with Lipitor off patent -- and ongoing headwinds in the U.S. and Europe," says Herman Saftlas, an equity analyst at S&P Capital IQ. However, he expects pretax margins to benefit from cost-streamlining measures, including an indicated 20% reduction in R&D spending.


Saftlas, who has reiterated his "buy" rating on Pfizer, notes a number of positive factors that he predicts will help the company resume earnings growth, which has been flat over the past three years, by 2013. It will be fueled by growth in emerging markets, cost restructuring, and stock buybacks. He notes the proceeds of $11.8 billion from the sale of Pfizer's nutrition business will be used for share repurchases and aggressive business development projects.


The analyst forecasts earnings in 2012 to jump to $2.24 a share from 2011's $1.11. For 2013, Saftlas projects a rebound in earnings, to $2.40 a share. Noting that Pfizer stands out above its peers in the $780 billion global pharmaceutical sector, Saftlas says Pfizer's product portfolio "is unmatched in terms of breadth and depth in the global drug market."


Apart from Lipitor, Pfizer's other large-sellers include Lyrica, a treatment for nerve pain and epileptic seizures, which generated sales of $3.7 billion last year; Prevnar vaccine, which also produced sales of $3.7 billion; Enbrel treatment for psoriasis and rheumatoid arthritis, with sales of $3.7 billion; Celebrex COX-2 inhibitor, with sales of $2.5 billion; and Viagra, which generated sales of $2 billion.   


Pfizer's animal health operations are another big revenue winner for the company, with sales last year of $4.2 billion. The division offers one of the best-selling and broadest product lines in the field.


Pfizer plans to launch a public offering next year for its Animal Health unit by selling to the public a 20% stake in the business, to be named Zoetis. Stephen A. O'Neill, drug analyst at investment firm J.J.B. Hilliard Lyons, says the IPO is part of Pfizer's pursuit of strategic alternatives for the thriving animal health business. In that sense, its value to Pfizer shareholders would be maximized, he says.


"Separation allows the company to focus on its global pharmaceutical and consumer medicines areas," says O'Neill. Rating Pfizer as a "long-term buy," O’Neill says the stock has one of the lowest price-to-earnings multiples in the industry and should benefit from an improving business mix. His 12-month target for Pfizer: $30 a share.

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.     

Aug 9, 2012 8:36AM
Wall Street is and has been managed for many years . It is the principal vehicle of extracting peoples money by the brokers,traders and businesses that comprise it.  The investor has little opportunity to make much money esp since 1998 when interest rates evaporated on savings and automated computer trading began. Only the insiders are privy to the data and trends of the markets movements except where a breakthrough commodity or service is innovated and then by the time its offered to the general investor it's designed to make windfalls for the principals at the expense of the investor. But with luck,correct information and a gambling personna, you might be able to improve your financial station for the shortfall, but who would have bet against Salmon,AIG,Merrill Lynch Wachovia etc without inside information,and what of J.P. Morgan. Its safer under the mattress for the foreseeable future,maybe forever
Aug 8, 2012 3:28PM

"Inside Wall Street: Should investors flee Pfizer? "


Investors should flee Wall Street..period!!  It is a manipulated rigged casino game that the average investor will lose at.

Aug 9, 2012 10:54AM

Everyone should buy Pfizer (PFE) since they are about to make a revolutionary new Alzheimer's drug.  Due to patent laws, they will make billions (with a B).


You should also buy Procter and Gamble (PG) and General Electric (GE) since they support U.S. Olympics.


In addition, you should buy Chevron and Exxon Mobil (CVX, XOM) since oil prices and profits will continue to rise.


Finally, now is a great time to buy McDonald's (MCD) since they are near their 52-week low.  They were over $100 in March, and now down to $87.  Great time to buy cheap.


Really Big Disclaimer:  I hold positions in all of these stocks.  Please buy them....

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