The story that the market sees is all about Liptor, the wildly successful treatment for high cholesterol. The patent for Liptor expires in 2011, and the market is concerned that Pfizer won’t be able to pick up the slack when generics close in on Liptor’s market when the patent expires. A subtext to this is the pending uncertainty of how healthcare legislation produced by a Democratic Congress and the Obama administration will affect big pharmaceutical players like Pfizer.
The good news about Pfizer for investors is its resiliency. It has been one of the strongest Dow components in the financial crisis, falling from a trading range of $18-$20 in the months before the Lehman bankruptcy to the current $14-$15 range ($15.19 at close on May 29), a modest decrease compared to most other Dow components. While the dividend was halved to save cash to finance the acquisition of rival Wythe, it currently sits above 4%, far better than a savings account will yield today.
So with the Liptor expiry and financial crisis hit already priced in, arguably the worst case result for Pfizer is that it will go nowhere and yield decent dividends. While the timing of the economic recovery is far form certain, I have argued that investors should plan for the possibility that it may take years or more for the more for a true recovery to take place. Given the wisdom of diversifying ones portfolio for different recovery scenarios, it makes sense to accumulate Pfizer on that basis alone. But in addition to the defensive aspect of this play, if Pfizer executes effectively by 2011—and while it can’t yet be proven that Pfizer will there is no proof that it won’t—the potential for big time appreciation is high.
An important part of the evidence on where Pfizer is going is in its capability to respond to a new regulatory environment. Perhaps no industry (even now including banking) faces as complex a regulatory web as pharmaceuticals. Jeffrey Kindler, who took over as CEO in 2006 after joining the company as General Counsel in 2002, spent the earlier portion of his career as a lawyer and partner with Williams & Connolly, a powerful Washington law firm with strong ties to both sides of the political aisle (having represented clients as politically diverse as former President Bill Clinton and Oliver North). Greg Simon, new Senior Vice President for Worldwide Policy, has strong inside Democratic credentials as a former senior adviser to Al Gore and Democratic legislative staff member.1
Certainly, the biggest unknown on Pfizer is whether its pipeline will produce drugs that pick up the Liptor slack. The market does not like uncertainly, especially in areas such as assessing the likely outcome of scientific research that market players are not well qualified or situated to assess. While it is possible that Pfizer will fall on its face and produce nothing to close the “Liptor gap,” it is rational to anticipate that a multi-billion dollar research organization managed by a 160 year old company that has paid dividends every year since 19012—and is in fact acquiring a major competitor with world-class research capabilities—will exceed these diminished market expectations.
There are various stocks that have potential to make massive gains in the coming months if things go their way. Since Pfizer’s decline was modest compared to most and the Liptor gap permeates analysts’ assessments of it, Pfizer isn’t well positioned to be one of them (though some appreciation due to likely dividend hikes once the merger settles would not be surprising). But if you want to round out your portfolio for an uncertain future that may include an extended period without healthy growth, Pfizer fits the bill. In addition to a healthy dividend, the degree to which future research and development failure is priced into its stock—while at the same time its competitive advantages in working the regulatory traps are probably not yet priced in—makes it a promising opportunity for the long-term.
(Note: The author holds a securities position that is long on Pfizer as of the original publication date of this post.)
- “Greg Simon, Noted Leader In Health And Science Policy, Joins Pfizer,” May 12, 2009, Pfizer, Inc, http://mediaroom.pfizer.com/portal/site/pfizer/?ndmViewId=news_view&newsId=20090513006350&newsLang=en. [↩]
- Brown, Carolyn, The Millionaires Club, p. 197 (John Wiley & Sons, 2000), http://books.google.com/books?id=1v2dxN-NhU0C&pg=PA197&lpg=PA197&dq=pfizer+dividends+every+year+1901&source=bl&ots=LqtK74ymbv&sig=WfxBNzZnM2TRcemQpxfUA8IW6MQ&hl=en&ei=qIwiSvLPEcWLtgffneSyBg&sa=X&oi=book_result&ct=result&resnum=7 [↩]