Novice Investing - Pfizer Cannot Erect

Date: Thursday 07th 2008f August 2008 01:40:18 PM

Pfizer Cannot Erect - 07/23/2007

By: Novice Investing Staff

The largest drug company in the world and the maker of the popular erection dysfunctional drug Viagra, Pfizer Inc. (PFE), had lost its luster lately. It began in December 2006 when the company halted development of key cholesterol blockbusters drug, Torcetrapib. With its similar existing drugs Lipitor facing patent expiry, Pfizer needed to look around fast. Lipitor had sales of $ 13 Billion in 2006.

For the second quarter of 2007, things look worse for Pfizer. Its biggest revenue contributor, Lipitor, experienced 13% drop in sales mainly due to wholesale inventory level, the company said. However, things might look worse than the company proclaimed. In its biggest market, the US, Lipitor sales dropped 25%. We believe that Lipitor sales had been harmed by the patent expiration of Merck's Zocor, which expired on June 2006. Going forward, we expect Lipitor to post disappointing sales with a drop as much as 30% from a year ago result. That brings down Lipitor revenue from $ 13 Billion in 2006 to $ 9.5 Billion this year. The $ 3.5 Billion in revenue loss would probably be absorbed by generic Zocor and Merck's Vyotorin. Meanwhile, using Pfizer's past gross margin figure, this revenue loss would translate into a reduction in earning of $ 2.9 Billion or $ 0.41 per share. Therefore, the worst case for Pfizer is to report EPS of $ 1.80 per share.

The only positive thing in the second quarter report is that Pfizer manages to increase its R&D spending 24% to $ 2.17 Billion. Meanwhile, in other area, Pfizer keeps its focus to cut cost. This is crucial and it shows that Pfizer's management is committed to the long term survival of Pfizer. Big Research & Development expense doesn't guarantee that every dollar spent by Pfizer is equal to every dollar spent by competitors but it is the step in the right direction.

Pfizer now expects earning to be in the $ 2.08 - $ 2.15 per share range for 2007, which is down from expectation. Assuming worst case scenario of $ 1.80 per share and its huge positive net cash of $ 22.6 Billion (or $ 3.23 per share), Pfizer is roughly valued at a P/E of 15 or $ 30.23 per share. Calculation is as follows:

Share Price fair value = P/E value x EPS + positive net cash

Share Price fair value = 15 x $ 1.80 + $ 3.23 = $ 30.23

Pfizer is traded at $ 25 per share lately. This is about 20% potential appreciation. While Pfizer and most analysts are still forecasting $ 2.12 EPS for the year, we feel that the worst case scenario is more likely now after the release of Pfizer's second quarter result. To go a little bit further, what would make Pfizer report a more optimistic scenario of say $ 2.20 per share of EPS? One would be to look at sales of newer drugs which had not moved the needle for Pfizer. Also, we would look at what is in store in the pipeline. Merck Co & Inc. halted the development of its joint venture diabetes drug, Murglitazar, but ended up releasing another diabetes drug Januvia. Januvia is expected to have a sales of $ 760 Million since its release less than a year ago. Not bad. Pfizer may erect another cholesterol drug despite the failure of its Tocetrapib medication. .

If such a thing happens, there is a big likelihood Pfizer will earn $ 2.20 per share for 2007. This would jack up Pfizer's fair value to: $ 36.23 per share or 45% potential appreciation from current price. For now, however, you would expect none of such a thing to happen and invest your money accordingly. For our sample portfolio holding, we only invest in a company that have a potential to appreciate 50% or more. Therefore, Pfizer is not a buy right now. It is getting close but not yet.

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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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