Pfizer (NYSE:PFE) was one of the hot big-cap growth companies during the 1990s. During this period, the stock went to $50 from $3 (adjusted for splits).
But for the past decade, the fortunes for investors have been meager. During this period, the average annual rate of return was -3.61%. And Pfizer was no exception. Other mega-pharmaceutical companies lagged as well.
Yet things have been getting better lately. Over the past year, the shares of Pfizer are actually up 23.65%.
But can the momentum continue? Here’s a look at the pros and cons:
Pros
New leadership. Late last year, Ian Read took over the CEO spot. He has worked for Pfizer for 32 years and has spent much of his time outside the U.S. This background will be critical as foreign markets will be a key growth driver — especially in the emerging economies like China and Brazil. Keep in mind that Pfizer already has a strong footprint of sales and distribution in these fast-growing countries.
Precision medicine. This stands to be a promising long-term growth opportunity. Traditionally, pharmaceutical drugs have been a one-size-fits-all approach to medicine. Unfortunately, this often leads to complications and terrible side effects. But with the use of data analysis and sophisticated software algorithms, precision medicine will target diseases that are unique to each patient. Actually, these types of drugs tend to be less costly as well as have faster development processes.
Unlocking value. Pfizer has a variety of strong businesses that could be good prospects for spinoffs. In fact, the company has already started the process with its $2.38 billion sale of its Capsugel business to KKR (NYSE:KKR). Other prospects for spinoffs include animal health, generic pharmaceuticals and nutritionals. Actually, the nutritional business may be worth $7 billion. This is based on the valuation of the successful IPO of Mead Johnson Nutrition (NYSE:MJN), which was a part of Bristol-Myers Squibb (NYSE:BMY).
Cons
Generic competition. Pfizer will see some of its blockbuster drugs come off patent protection over the next couple years. The result will be a deceleration in revenues as generic drug companies get more market share. True, Pfizer has been working hard to boost its pipeline. But there will certainly be risks. Just recently, the company failed to pass Food and Drug Administration muster with its Tafamidis drug, which treats neurodegenerative disease.
Government regulations. With medical costs spiraling out of control, there are more initiatives to try to contain the inflation. There is also the uncertain impact of “Obama-care.” But the U.S. is not the only country with runaway medical costs. It is actually a worldwide phenomenon. In other words, many foreign governments will try to find ways to lower costs and this will put pressure on Pfizer.
Litigation. Large pharmaceutical companies keep their attorneys busy. But perhaps the area with biggest risk is product liability, as seen with Merck’s (NYSE:MRK) huge problems with Vioxx. As drugs get more complicated and reach massive populations, the potential liability exposures can be substantial.
Verdict
While Pfizer will suffer from the loss of patent protection on some key drugs, this has already been discounted by investors. If anything, the company has a robust pipeline, which includes more than 100 drugs.
Pfizer also is taking steps to cut back costs, such as by outsourcing research & development. This should help to boost profits. The company also plans to buy back $5 billion in stock in 2011 and should benefit from the upcoming spinoffs.
Adding it up, the pros outweigh the cons on this stock.
At the time of publication, Tom Taulli did not own shares of any company mentioned in this article.
