Stock of the Day - January 21, 2009

Pfizer Inc (PFE)

Pfizer Inc (PFE), the world’s largest pharmaceutical company, engages in the discovery, development, manufacturing, and marketing of prescription medicines.  The company produces well-known drugs such as Lipitor, Viagra, Celebrex, Zyrtec, and Zoloft.  Pfizer’s stock price is currently trading at $17.48, and it is 26.52% off of its 52-week high of $23.79.

Pfizer has many positives that make it seem like a great investment.  First of all, demand for major drugs are generally independent of macroeconomic factors due to the fact that people always need medicine, rich or poor. Thus, Pfizer is a largely recession-proof stock and has not been hurt as badly as companies in cyclical sectors, such as construction and technology. 

Pfizer is also very financially flexible, as the company currently has $26 billion of excess cash.  This extra money will allow Pfizer to potentially buy another pharmaceutical or biotechnology company.  With the acquisition of another company, Pfizer will add more popular drugs to its pipeline of products, and will increase revenues as a result.  In order to cut costs and become even more profitable, Pfizer is also cutting some jobs.  The company recently cut one-third of its sales force and also cut 800 research jobs.  The company also pays a higher dividend to its shareholders than any other pharmaceutical company, as it pays out a huge 7.36% yield. 

So, what is there not to like? The first problematic issue for Pfizer is an issue that all companies in the pharmaceutical industry must face: Patent expirations.  Drug companies like Pfizer obtain patents when they invent a new type of drug, but these patents do not last forever.  Once the patent expires, generic drug makers enter the market, and due to the competition, the price of the medicine is drastically reduced.  The issue of patent expirations is staring Pfizer directly in the face, as the company’s patent on its most popular drug is set to expire in 2011.  Lipitor, Pfizer’s cholesterol-lowering medication, is the world’s highest-selling drug.  Pfizer makes $13 billion per year from Lipitor, and the drug is responsible for 26% of the company’s revenue! With the company’s patent on the famous drug set to expire in two years, many investors are afraid that Pfizer will have no way of making up that loss of revenue.  Zoloft, a medication for depression, was a huge drug for Pfizer until its patent expired in 2005.  After Zoloft’s patent expired, sales of the drug were absolutely crushed.  The example of Zoloft could foretell what is to happen to sales of Lipitor once the drug’s patent expires.  If Pfizer does not find a new drug on the same level as Lipitor in the next two years, the company will have a hard generating enough revenue to produce a profit.

Another problem for both Pfizer and the entire pharmaceutical industry is the issue of political threats to pricing power.  Barack Obama has stated on numerous occasions that he is planning on making it easier for generic drugs from overseas to be bought in the United States.  While this may end up being great for the average American, as medicine will become much cheaper, pharmaceutical companies will suffer.  Companies like Pfizer will no longer be able to charge high prices for their brand-name drugs, as generic drugs will come into the market and create a price war.  Without their high profit margins on their famous brand-name drugs, companies like Pfizer will be financially hurt. 

So, while Pfizer is the biggest pharmaceutical company and while it is sitting on a huge pile of cash, it is clear that the company’s future is anything but bright.  Its biggest drug is set to lose its patent very soon, and the new administration in Washington is threatening to severely cut into the company’s profits.  The only hope for growth that Pfizer has at this point is to either come up with a drug with earnings potential on the level of Lipitor in the next couple of years, or to use its huge amount of excess cash to buy another pharmaceutical company that could potentially provide the company with the next all-star drug. 

Although the stock does provide investors with a nice dividend yield and it is recession-proof, I believe that the negatives weighing on the company’s future make Pfizer a bad long-term investment.

 

Niki Pezeshki

College Trillionaire