After being rejected four times in its takeover bid for British pharmaceutical rival AstraZeneca (AZN), Pfizer (PFE) announced in late June that it would no longer be pursuing a merger. Although rumors persist that the company may make another run at a merger by the end of the year, the likelihood that AstraZeneca would seriously entertain such an offer is slim.
Pfizer needs to acquire a strong drug pipeline to grow its top line. This reality has led to speculation that another large pharmaceutical company, GlaxoSmithKline (GSK), may be a potential target. Its market cap is close to AstraZeneca’s; it is based in the U.K., allowing a potential tax inversion; and a merger would allow for significant synergies and provide Pfizer with the drug pipeline it needs. This may only be a possibility after Pfizer exhausts all possible options with AstraZeneca.
In the meantime Pfizer is not standing still. In June, Pfizer entered into an agreement with Cellectis, a French biotech company, which will allow it to expand its oncology pipeline. It opened its new state-of-the-art research and development facility in Cambridge, Mass., the same month. In July, it inked an amended licensing agreement with Puma Biotechnology (PBYI) that will provide for greater upside if its high-potential breast cancer drug takes off and purchased Baxter International’s portfolio of marketed vaccines. This week, the company announced a new collaboration with Merck (MRK) to explore the therapeutic potential of the combination of Pfizer’s crizotinib drug and MRK’s pembrolizumab in the fight against lung cancer.
Struggling for Growth
Annual sales at the company have been relatively flat over the past decade at around $50 billion a year with a bump to $68 billion in 2010 and 2011 due to the Wyeth acquisition in 2009, but with a spin-off and lower drug sales they have retreated back to the ~$50 billion level in 2013.
Pfizer posted second-quarter sales slightly above estimates but by no means stellar. Sales were down 2% from the previous year to $12.77 billion and earnings dropped 6% from the previous year to $3.77 billion. Based on these results, Pfizer lowered its full-year sales target to a range of between $48.7-$50.7 billion from $49.2-$51.2 billion.
Weighing on Pfizer’s future prospects are several factors:
- expiration of it patent for Celebrex, its blockbuster arthritis drug, in December 2015;
- the recent expiration of exclusivity of Viagra in China;
- litigation around Lipitor, its bestselling cholesterol lowering drug due to a recent report by the Food and Drug Administration that suggested it may be contributing to an increased risk of type II diabetes; and
- uncertainty around its pipeline of new drugs.
PFE Stock: Strong Fundamental Value
Even with key drugs coming off patent, Pfizer continues to have strong potential with 20+ drugs in its pipeline at the phase 3 development stage or later. As of the second quarter, PFE had over $34 billion in cash and short-term equivalents with $39 billion in long-term debt including pension obligations, producing a net $5 billion debt position, very manageable given its size. In addition, PFE’s price-to-book ratio of 2.4 is far below the industry average of 3.9.
PFE Stock: Income and Upside
As new drugs come to market and the competitions of generic drugs in its current portfolio abate, Pfizer should be able to maintain or slightly grow its top line revenue numbers in the next 3-5 years. Pfizer is well known for its marketing ability. This marketing ability will benefit any new acquisition and strengthens the chance that any new drug within its pipeline that comes to market will be fully leveraged.
With a dividend yield of 3.5%, PFE stock is perfect for investors who are looking for income and low-risk exposure to the pharmaceutical industry with potential upside if Pfizer is able to complete a big acquisition in the near future.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@ip.com or follow him on his blog at www.piercethefog.com.
