Back in late April, Pfizer (NYSE:PFE) dropped something of a negative surprise on investors with its fiscal fourth-quarter earnings.
The company was able to improve earnings to 53% to $2.75 billion (38 cents per share) despite a 9% decline in revenues to $13.5 billion, but both figures missed Street estimates of 55 cents per share on $13.99 billion in sales. The immediate response was a nearly 5% haircut.
Granted, there were some offsetting factors. Pfizer was hampered on the currency side by both a resurgent dollar and a volatile yen (Japan is one of PFE’s more crucial markets), not to mention it also has just spun off its Zoetis (NYSE:ZTS) animal-care division. And in the past couple weeks, PFE shares have regained some of that lost ground.
So, is Pfizer better off than Wall Street initially thought, and worth a buy? To see, let’s look at the pros and cons:
Research & Development: Pfizer has made strong improvements to this side of the business thanks to, interestingly enough, a focus on partnerships and licensing with firms such as Merck (NYSE:MRK), AstraZeneca (NYSE:AZN) and Chinese pharma outfit Zhejiang Hisun Pharmaceutical. Although, acquisitions have been important, too. One savvy deal in late 2012 for NextWave Pharmaceuticals gave Pfizer access to an approved drug for attention deficit hyperactivity disorder. Core internal R&D programs are also showing lots of promise, with breakout drugs like palbociclib (cancer treatment), tofacitinib (rheumatoid arthritis) and Eliquis (blood thinner) sitting down the pike.
Restructuring: Over the past few years, Pfizer has aggressively streamlined its operations, primarily through the unloading of non-core assets. That includes deals like its Zoetis (NYSE:ZTS) spinoff, which raised $2.2 billion, and the sale of its nutrition business to Nestle (OTC:NSRGY) for about $11.85 billion. These deals should help management focus more on the drug development side of the business, which is critical for growth.
Shareholder-Friendly: PFE has a history of large buybacks and distributions. So far in 2013, the company has repurchased 227 million shares for a total of $6.3 billion, and Pfizer has bought back roughly 1.1 billion shares since 2010. Meanwhile, its dividend sits at an attractive 3.3%.
Patent Cliff: In 2011, PFE lost the patent protection on its cholesterol drug Lipitor, and as a result, generic drug operators have taken away significant market share. In Q1, Lipitor sales plunged by 55% to $626 million. Pfizer also has recently lost protection for other important drugs like Geodon (schizophrenia) and Detrol (overactive bladder), and it must deal with the expiration of various collaboration agreements, such as with Amgen’s (NASDAQ:AMGN) Enbrel and Boehringer Ingelheim’s Spiriva.
Budget Pressures: In August 2011, Congress passed the Budget Control Act, which set forth spending reductions for reimbursement programs like Medicaid and Medicare, and Europe also is undergoing harsh austerity programs … and all of that means less money is available for pharmaceutical subsidies.
Managed Care: The healthcare industry is trying to reduce costs, and the pharma industry is a primary target. Obamacare threatens to strain the managed care industry, and as a result, they will try to make up for this by exacting better terms from companies like Pfizer. And because the managed care industry has undergone a great deal of consolidation over the years, its negotiating leverage has only gotten stronger.
In light of the patent issues, Pfizer has done a commendable job managing its expected revenue shortfalls. The company has bolstered its pipeline and has a variety of promising prospects, and its restructuring efforts should only help the company hone in on its new-drug chase.
So should you buy Pfizer? Yes — given its resiliency, payout and reasonable valuation (12 times forward earnings), the pros outweigh the cons on PFE for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.