Novice Investing - Pfizer Bad Cholesterol

Date: Friday 29th 2008f August 2008 09:59:37 PM

Pfizer Bad Cholesterol - 12/01/2006

By: Novice Investing Staff

As a reminder that nothing in this world is certain, Pfizer Inc. (PFE) announced this week that it had scraped the development of its key cholesterol drug, Torcetrapib. Aside from its difficult pronunciation, it is hard to believe why Pfizer has to scraped this potentially the biggest drug seller of all time. For your knowledge, Torcetrapib is designed to raise good cholesterols, HDL. Pfizer is hoping to combine Torcetrapib with its best cholesterol selling drug, Lipitor. Lipitor is designed to reduce the level of bad cholesterol.

Also, as Lipitor will lose its patent protection in 2010, Pfizer needs a blockbuster big enough to fill the hole of Lipitor's $ 13 Billion annual sales. If approved, Torcetrapib will do that just fine. Now, this hope has vanished. Despite spending a staggering $ 800 Million on Torcetrapib, Pfizer has to stop the development of this drug, due to increased death and heart problems to patients in a late-stage trial.

To get an idea how devastating this new development is, you need to understand how successful Lipitor is. With $ 13 Billion in revenue, it is roughly half of Merck Co & Inc.(MRK)'s revenue. Merck itself is valued close to $ 100 Billion and thus, this potential loss of revenue would shave $ 50 Billion off Pfizer's market capitalization. With 80% gross profit margin, the loss of revenue of Lipitor in 2010 will evaporate $ 10.4 Billion in additional profit for Pfizer, unless of course Pfizer decides to do a deep cut and adjust its cost structure further. That may happen and Pfizer will reduce the reduction in profits in 2010.

Seriously, without Torcetrapib, it is almost impossible for Pfizer to continue earning $ 2.05 per share. Pfizer of course, can get creative and with a combination of cost cut and numerous small acquisitions, the net impact of Lipitor's patent expiration can be less than $ 5 Billion. (in terms of revenue). Even that is close to 10% of Pfizer's entire revenue for 2006. Either way, Pfizer's net income for 2010 and beyond will be reduced by at least 50 cents per share. With $ 1.50 per share in normalized earnings and its slower growth (due to its huge size), it is hard to fathom how Pfizer's stocks can be a good investment at current price ($ 23.50 per share).

Some analysts have floated the idea for Pfizer to make big acquisition, acquiring Wyeth (WYE) or Amgen (AMGN). That is a futile attempt to prop up stock price. While investment bankers love merger due to the fees they collect, buying say Amgen for $ 80 Billion is a waste of shareholders' money. Assuming that this deal is a stock deal, Amgen is more richly valued than Pfizer. Thus, the merger will not create shareholders' value unless you are an Amgen shareholder.

Pfizer's healthy balance sheet would probably one of the few positives here. With about $ 10 Billion in positive net cash and tons of cash flow produced each year, Pfizer is a solid company in the industry. Its balance sheet strength would probably help the company increase its dividend close to 100% of its net income, if it decides to. Right now, Pfizer offers dividend of $ 0.96 per share, which may be raised to $ 1.40 per share by 2010. This assumes that pipeline stays dry and dividend needs to be propped up to support this mammoth. Nothing wrong with that. However, please keep in mind that a no-growth stocks need to trade at a P/E of 10 before one consider it a bargain.

If you are not invested in Pfizer yet, please don't. At this point, the stock would probably be the next decade's Microsoft, hovering between $ 20 to $ 30 for a long long time.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Pfizer Inc. (PFE) or any other securities.

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