Berko: An investor Rx for Pfizer
Thursday, July 24, 2014 6:00 AM
Dear Mr. Berko:
I know that Pfizer Inc. has made several big drug company purchases in the past 10 years, and Wyeth (I used to work for that company) was one of them. But its failure to buy AstraZeneca concerns me. I’ve owned 600 shares of Pfizer since you recommended it at $28 in 2003. It did rise to $39 six months later, but as a long-term investment, this stock is a disaster. Is there any reason that I should not sell it? For the record, Wyeth was a fine company until Pfizer took it over.
-- J.D., Fort Walton Beach, Fla.
I admit that Pfizer’s (PFE-$30.41) share value poorly reflects its various acquisitions – such as its purchase of Warner-Lambert in 2000, which included Parke-Davis and Wilkinson Sword, its acquisition of Pharmacia in 2002, which included G.D. Searle and Upjohn, its purchase of Wyeth in 2009 and its acquisition of King Pharmaceuticals in 2010. Frankly, I can’t remember when a series of superb pharmaceutical acquisitions has ever produced such stinky results. Though I don’t have supporting numbers, my gut tells me that the acquisitions of these fine pharmaceutical companies destroyed shareholder value instead of enhancing it. Certainly, PFE’s share performance in the past decade has been one of the most profound disappointments (its Zoetis spinoff in 2012 notwithstanding) for individual investors since John Thain (a Harry Reid look-alike) was appointed president of the New York Stock Exchange so it could be rigged for computerized trading.
But no – a thousand times no – don’t sell your PFE. Though some believe that PFE’s stock couldn’t look much worse, its 3.4 percent dividend ($1.04) is likely to grow to $1.30 by 2018. And like many frustrated investors who sell a well-known, poorly performing company after a decade of patience, you might see PFE’s share price jump 20 percent within a month if you were to sell, just to spite you. If Pfizer’s management truly wishes to improve its shareholder value, the company ought to dissolve itself and allow Warner-Lambert, Wyeth, G.D. Searle, Upjohn and Pharmacia to become public companies again. I can’t imagine a more effective way to reward patient shareholders. Meanwhile, contrary to Wall Street opinion, PFE’s poorly managed attempt to buy AstraZeneca PLC (AZN-$75.01) is still treading water. It could happen before year’s end.
PFE’s 6.3 billion shares are on track to earn $1.91 in 2015, up from $1.67 this year, and the dividend may be increased to $1.11, offering a 3.65 percent yield on the current price. That’s a good yield, and it should improve annually over the coming decade. Though Lipitor has become a shell of its former self (generic competition), blockbusters Prevnar, a vaccine for pneumococcal disease, and Lyrica, a relief from fibromyalgia and diabetic nerve pain, should contribute over 20 percent of revenues this year. PFE’s oncology revenues may rise by 30 percent, and notable though infant-stage drugs such as Inlyta and Xalkori are expected to produce more than $2.3 billion in revenues in 2015.
PFE’s pipeline remains one of the best in the business. Its Xeljanz could be a game changer in the rheumatoid arthritis market, and its Eliquis is expected to be a blockbuster drug for atrial fibrillation. And three drugs, two of them with no name besides a weird identity such as rLP2086, currently in late-stage trials may bring smiles to shareholders’ faces if the shareholders are patient for a couple of years. PFE has developed an impressive and unique database of intellectual insights into drug development that will improve its effectiveness in bringing new drugs to the market. And the company is able to harness enormous cash flow from its current product portfolio to support continuing discoveries of next-generation drugs. The average cost to bring a new drug to market exceeds $800 million because of the Food and Drug Administration’s stumbling bureaucracy. Fortunately, PFE may have the best sales force in the business. While they help market drugs developed by PFE, they make the company attractive for smaller pharmaceuticals that need to distribute their products.
Give PFE another dozen months, and be comfortable getting a 3.4 percent dividend yield while you wait. If PFE doesn’t make a solid price turn in 12 months, write me again.
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