Pharmaceutical stocks have had a rough go of things over the past one year, with Washington’s ongoing debates regarding capping the price of prescription drugs the most obvious culprit.
Pfizer Inc. (PFE) has suffered from this with the rest of the industry. For perspective, the NYSE ARCA Pharmaceutical Index (DRG) has returned a loss of 12.2% over the past year, much in line with the 12.3% loss that Pfizer stock has seen over the same period.
Moreover, a tax activist group — American for Tax Fairness — are aiming at PFE, claiming Pfizer is planning to dodge a hell of a lot more in tax than it stated regarding its merger with Allergan (AGN).
And the fact that experts have said such a report is misleading brings the issue of the savings benefits of the inversion deal to limelight once again. Against this backdrop, here are three positives and three negatives of Pfizer stock that should interest investors.
Pfizer Stock Pros
Growth on the Horizon After: It’s becoming increasingly difficult to put growth and PFE in the same sentence in recent years, at least as far as revenue goes. Between January 1996 and December 2005, Pfizer stock saw 389% growth in revenue. However, the next decade starting January 2006 and ending December 2015 saw a 1% increase in revenue. With this, it’s fair to say that Pfizer stock has kissed the years of sky-high growth rate goodbye.
However, the merger with Allergan offers a little hope for growth. Put simply, Allergan is still in its active growth years. Allergan saw a 636.2% increase in revenue between January 1996 and December 2005. Unlike Pfizer, though, it recorded a 661.5% increase in revenue in the next decade between 2006 and 2015. In short, joining forces with a company that’s still actively growing inherently means that Pfizer is about to witness more years of active growth. In fact, expectations are that Pfizer stock could witness a double-digit EPS growth rate by 2020, thanks to this merger. Its EPS growth has been lackluster in recent years.
Savings on the Horizon: The chief highlight of the deal with Allergan is that PFE stock could be able to save $1.2 billion in taxes next year — once the deal is completed. Let’s disregard the dubious savings claim by ATF for now. Because, as experts claim, there’s no proof Pfizer plans to bring those earnings to the State to start with. Still, a $1.2 billion tax savings shouldn’t be swept over as insignificant. And while, it might not become obvious once Pfizer stock starts crediting the Irish government its taxes, I believe the underlying savings will get better, as operational efficiency is bound get better over time. And it shouldn’t also go without saying that, apart from this deal, Pfizer stock has been aggressively reducing is expenses, with its total annual expenses reducing by over 23% in the last five years.
Building an Oncology Presence: It’s true that Pfizer had a late entry into the oncology space. And perhaps, because the healthcare space is known for offering a first-mover advantage, it’s been hard to appreciate the work Pfizer stock is doing in the oncology space. But Pfizer is advancing rapidly here. For perspective, the company’s breast cancer drug, Ibrance, raked in a total of $732 million in just about three and a half quarters, having received regulatory approval in February 2015. That’s not a bad performance for a first ten-month period. And no, that’s not because Pfizer has been trying to put pressure on prices. Albert Bourla of PFE said during the JP Healthcare conference in January that patients taking Ibrance saw a sequential increase of about 33% between Q3 and Q4. If you factor this information into the fact that Ibrance saw a 37% increase in revenue over the same period, it would be easy to see that there’s no pricing pressure here — Ibrance should easily hit the $1 billion mark in full-year 2016.
Lesson? Pfizer is able to make cancer drugs that oncologists trust.
And things are bound to get better. During the JPMorgan Chase conference, Pfizer stock confirmed that it has 28 programs with avelumab, which is in the immuno-oncology space. Seven of these are registration-enabling studies. In short, investors should appreciate what PFE is doing in the oncology space.
Pfizer Stock Cons
Patent Cliff: One thing that has threatened Pfizer’s growth over the last few years is patent expiration. In fact, Pfizer stock is an ultimate illustration of the patent cliff. Lipitor, the best selling drug in history, lost patent protection in 2011 and sales has since been on the decline. In 2010, Lipitor rakes in over $5 billion in sales. Sadly, though, in 2015, Lipitor raked in a meager $456 million in sales. Celebrex, which saw a 31% and 65% decrease in sales in 2014 and 2015 respectively, is another example. Pfizer acknowledged in its fourth-quarter report that it will experience a negative impact of $2.3 billion resulting from competition for its drug that has or will soon lose patent protection. Investors have to be mindful of this.
Dividend Uncertainties From Patent Cliff: Many analysts today recommend Pfizer stock as a dividend play, and rightly so. After all, it pays $0.30 quarterly dividend, which has a juicy 4% yield. However, if Pfizer stock doesn’t quickly replace its drugs that have lost and poised to lose patent protection, cash flow will be threatened, increasing the uncertainty that its dividend payments will continue to be reliable. Bear in mind that it halved its quarterly dividend to 16 cents in 2009.
Sizable Debt Burden: As potentially lucrative as the Pfizer-Allergan merger is, investors should bear in mind that the two companies have huge debt commitments. Pfizer’s total long-term debt currently stands at about $38.9 billion, while that of Allergan stands at $40.5 billion. While the $160 billion fee for the merger will cater for Allergan’s debt, per the terms of the agreement, Pfizer would still have a lot to settle. You’ll know that the debt here is high on seeing that competitors Johnson & Johnson (JNJ) and Eli Lilly (LLY) have total long-term debts of $19.86 billion and $7.98 billion respectively. So this is important to note.
Bottom Line on Pfizer Stock
There are different narratives as to the investment viability of Pfizer stock, depending on your investing time-based orientation as well as goals.
If you’re seeking a company that offers quick growth, you’re best off without Pfizer stock. You want to note that the growth I outlined above can only be meaningful over the long-term.
Yes, the merger with Allergan will make significantly improve revenues. Still, investors want to note that Allergen is going to combine with Pfizer and its already high valuation. For instance, it has a trailing-twelve-month-period PE of 33.6, edging ahead of its industry average of 32.1 and Pfizer’s 27.3.
However, if you’re long-term oriented and an income seeker, Pfizer stock deserves a consideration. It has consistently paid dividend for over two decades now and has quite consistently raised it, bar a reduction in 2009.
As of this writing, Craig Adeyjanu did not hold a position in any of the aforementioned securities.
