Pfizer ( PFE ) disseminated some bad news this past week. The well-known drug maker reported that due to an unexpected number of deaths, it will halt trials for a key new cholesterol treatment it had been developing called torcetrapib. This is a big hit for Pfizer, because the product was expected to generate as much as $5 billion in annual sales in the U.S. alone.
But is this the company's death knell?
Not at all. But I still would wait for a pullback before buying in.
Here is what I continue to like about Pfizer:
Although many in the investment community think that the newly elected Democratic Congress could put the kibosh on big name drug companies such as Pfizer, I'm not so sure. In fact, I think that the gridlock in both chambers will prevent lawmakers from doing any real and lasting damage to the pharmaceutical industry.
Based on that assumption, I also think that Pfizer could be a solid stock to own in the next 12 to 24 months, with one caveat.
I'd buy it on a pullback, preferably below $20 (for some insurance) as talk of things like "nationalized healthcare" and "cost caps" could have a near-term headline impact on the shares.
As well, it has a tremendous array of both pharmaceutical and consumer goods under its roof. In fact, most all Americans have heard of or have used some of the company's more popular brands.
For example, on the "pharma" side of the business there is Celebrex (for arthritis), Lipitor (for high cholesterol), Zyrtec (for allergy relief), and Viagra (for, well, you know...). On the consumer side of the business, there's Benadryl, Rolaids, Rogaine, Visine, Listerine, and a host of other brand name goods that line most everyone's medicine cabinets at home.
My point is that this product diversity will help insulate the company somewhat should lawmakers talk up the introduction of new bills touting universal health care, and/or drug price caps in the 2007 legislative session.
Another thing I like is that although Pfizer is a huge company, it does a fairly good job at getting out in front of an issue. For example, because of the growing threat that generic drugs will put a damper on some of its flagship products (including Lipitor), Pfizer was pretty quick to announce some big cuts to its sales force.
In fact, just this past week the company announced that it plans to terminate as much as 20% of its salespeople in the months ahead. The move is expected to save the company at least a couple of hundred million a year going forward. And rumor has it that there might be more cuts coming. For investors, this is terrific news, and should serve as a catalyst to propel the stock higher.
Then there is the company's $12 billion cash position. I think that management really needs to put some of that cash to work, either in the form of new research/drug development, an accretive acquisition, or both. And I suspect we will see some action on this front in the not too distant future. That's because its chief exec, Jeffrey Kindler is, I believe, a pretty "media wise" guy who is aware of what investors want to see from the company.
As an example of his PR savvy, at a New York-based analyst meeting last week, Kindler said full year 2006 earnings should come in at or above $2.05 a share, which is about a nickel north of the company's prior forecasts. But more importantly, he, and his head of global research John LaMattina, outlined progress the company has been making on its pipeline.
Specifically, LaMattina commented that the total number of Phase III products will increase dramatically over the next three years (some think it could actually triple by 2009). The point is that this is the type of information that makes headlines. And it's what investors want to hear. It's also what I mean when I say that Kindler is media wise.
As mentioned above, beyond the company's efforts to build out and advertise its pipeline, I suspect that it may become active on the acquisition front as well. I have always thought that Bristol Myers ( BMY ) and Schering Plough ( SGP ) would make solid acquisition targets for either Merck ( MRK ) or Pfizer. But again, that is speculation on my part.
With all of that in mind, investors should be aware that there isn't expected to be any blockbuster drugs hitting the market in the coming year. And with Lipitor facing stiffening competition, and other drugs such as Zoloft (an anti-depressant), and Zithromax (an antibacterial treatment) already off patent protection, not to mention the above-mentioned political headline risk, Pfizer's stock could very well take it on the chin a bit over the next few quarters.
But again, I believe that patient investors will find that Pfizer has the geographic footprint, marketing prowess, and deep pockets that make the company and its shares attractive.
The Bottom Line
In spite of the torcetrapib disappointment, Pfizer remains a solid company. But at this point, I would wait until the dust settles before jumping in. The near-term headline risks suggest that the patient investor may very well get the chance to buy the shares at a more advantageous price. |
