PFIZER INC. $23 (New York symbol PFE; Income Portfolio, Manufacturing & Industry sector; Shares outstanding: 7.5 billion; Market cap: $172.5 billion; Price-to-sales ratio: 2.5; Dividend yield: 3.8%; TSINetwork Rating: Above Average; www.pfizer.com) is the world’s largest pharmaceutical drug maker. Its top-selling brands include Lipitor (for high cholesterol), Lyrica (epilepsy), Celebrex (arthritis pain), Viagra (erectile dysfunction), Xalatan (glaucoma), Norvasc (hypertension) and Zyvox (bacterial infections). The company is also the world’s fifth-largest maker of over-the-counter drugs. Its major brands include Advil (pain relief), Centrum (vitamins) and Robitussin (cough syrup).
Pfizer gets about a third of its revenue by selling its products to drug wholesalers. The other two-thirds come from direct sales to retailers, hospitals, clinics and government agencies. Overseas markets supply 60% of its revenue.
Acquisitions added top-selling drugs
The company’s revenue fell from $48.4 billion in 2007 to $48.3 billion in 2008, but jumped to $67.8 billion in 2010. That’s largely due to its $68.2-billion cash-and-stock purchase of rival drug maker Wyeth in October 2009. That gave Pfizer access to several promising new products, including Enbrel (for treating rheumatoid arthritis) and Effexor (an antidepressant).
As well, in February 2011, Pfizer paid $3.6 billion for King Pharmaceuticals Inc., which specializes in drugs that help relieve pain and relax muscles.
Even with these new businesses, Pfizer’s revenue fell 0.6%, to $67.4 billion, in 2011. That’s mainly because generic drug makers released cheaper versions of Lipitor after Pfizer’s U.S. patent on the drug expired; Lipitor supplied 14% of Pfizer’s 2011 sales.
Earnings fell 2.6%, from $8.2 billion, or $0.17 a share, in 2007 to $7.9 billion, or $0.17 a share, in 2008. Earnings rebounded to $8.5 billion, or $1.21 a share, in 2009, but fell to $8.2 billion, or $1.01 a share, in 2010. In 2011, earnings improved 6.4%, to $8.7 billion, or $1.11 a share.
Without unusual items (such as costs to integrate Wyeth and King), earnings per share would have risen 4.1%, to $2.31 in 2011 from $2.22 in 2010.
Lipitor still has a bright future
To help Lipitor compete with generic versions, Pfizer is now offering consumers and health insurance plans price discounts to keep using the branded drug. Pfizer has also formed a five-year alliance with Watson Pharmaceuticals Inc. (New York symbol WPI). Under the terms of this deal, Pfizer will make a generic version of Lipitor that Watson will sell in the U.S. Pfizer feels these moves will let it hang on to a third of the Lipitor market.
As well, Pfizer is now working on several new drugs that it believes will be as successful as Lipitor. For example, it has teamed up with Bristol-Meyers Squibb Co. (New York symbol BMY) to develop Eliquis, an anti-stroke drug. This product could add $4.5 billion to Pfizer’s yearly revenue.
Right now, the company has 90 drugs in its development pipeline. It recently won Food and Drug Administration (FDA) approval for Xalkori (a lung cancer treatment) and Prevnar (pneumonia).
Pfizer spent $9.1 billion (or 13.5% of its revenue) on research in 2011. That’s down 3.0% from $9.4 billion (or 14.0% of revenue) in 2010. The drop is mainly due to savings from Pfizer’s merger of its research operations with those of Wyeth.
The company can easily maintain its high research spending. Its long-term debt of $34.9 billion is a moderate 16% of its market cap. It also holds cash of $26.8 billion, or $3.55 a share.
As well, Pfizer recently agreed to sell its nutrition division (which supplied 3% of its 2011 revenue) to Switzerland-based Nestle S.A. for $11.9 billion. This business makes formula and nutritional products for infants and small children. The deal faces several antitrust hurdles, but it should close in mid-2013.
The company is also looking to sell or spin off its animal-health division (5% of revenue), which makes vaccines, medicines and diagnostic tests for livestock and pets.
Buybacks enhance Pfizer’s appeal
Pfizer will probably use the cash from these sales to fund its aggressive share buyback plan.
It recently added $10 billion to the $2.5 billion remaining on its previous authorization; the total of $12.5 billion is equal to 7% of its market cap. Pfizer aims to repurchase $5 billion of its shares in 2012, and use the remaining $7.5 billion in 2013.
To conserve cash following the Wyeth acquisition, Pfizer cut its annual dividend rate by 50%, to $0.64 a share from $1.28. However, the extra cash flow from the new operations has let the company steadily increase the payout. The current annual rate of $0.88 a share yields 3.8%.
Pfizer shares are up 15% since we first recommend them at $20 in our July 2011 issue. Even so, we feel the stock has plenty of growth ahead. It trades at just 10.2 times Pfizer’s forecast 2012 earnings of $2.25 a share.
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