Pfizer Stock – Not the Right Gift This Year

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Forget about Pfizer ($21.14), for now at least; it’s damaged goods and the wrong holiday present. That’s basically the word from Morningstar, the Chicago-based research house and mutual fund tracker.


I’m writing about Pfizer, the world’s largest pharmaceutical company (2004 sales: $52.5 billion) in response to an email from Kaiser Raab, who recently wrote: “Hello Dan, I’m thinking of giving my nephew a thousand shares of Pfizer for Christmas to help him see his way through college. With a lot more of us entering our golden years and a stable of drugs that includes Lipitor and Viagra, I figure Pfizer is a can’t-miss situation. My broker agrees. He is strongly recommending I buy the stock, but he mentioned to me he recalled seeing an unfavorable article you had written about the company maybe a year ago. Are you still down on Pfizer? If so,why?”


Personally, Kaiser, I’m not up or down on Pfizer, but your can’t-miss designation seems way out of line. Before getting carried away, it’s worth noting that a number of years ago Pfizer was the single most recommended stock in investment newsletters, but no more. Likewise, look at the performance of the stock, which, despite its seemingly favorable outlook, has been a deadbeat the past couple of years, having closed 2003 at $35.33. It’s also down this year from its 2004 wrap-up of $26.89. So aside from Merck’s problems earlier this year with Vioxx, which cast a pall over all drug stocks, it behooves you to ask, what’s wrong with Pfizer?


What’s wrong can be gleaned from a recent incisive commentary written by an analyst at Morningstar, Tom D’Amore, who focused on its growth prospects and latest financial results. Indeed, if his assumptions are on the money, it would surely indicate a flat, if not lower, stock price ahead.


Noteworthy are the analyst’s expectations of lower long-term growth, lower overall profitability, and the lowering of his five-year sales forecast.


In fact, after reviewing the company’s latest financial results and analyzing his key assumptions, Mr. D’Amore has just reduced his estimated fair value of the stock 12% to $28 a share from $32.


Although Pfizer is launching what the analyst considers some exciting new drugs, such as Lycra for pain and Exubera for diabetes, Mr. D’Amore thinks sales growth through 2009 will be no better than flat, down from a previous compounded annual growth rate forecast of 2%, as some of the company’s mainstay drugs are slowing.


Indicative of this slowing is Pfizer’s disappointing third-quarter sales, which declined 5%. This drop was due to weaker than expected results for many of the company’s key drugs. In particular, sales of its cholesterol fighting Lipitor (the best-selling prescription drug in the world with $12 billion in annual sales) were less than he forecast, growing just 5% from the previous year. In addition, Pfizer’s sales of Zoloft (an antidepressant) and Detrol (a drug to treat overactive bladders) were essentially flat, while sales of Viagra, an erectile dysfunction treatment, fell 4%.


Mr. D’Amore, who attributes the lackluster results to slower growth in the prescription drug market overall and slipping market share, is reducing his projected long-term earnings growth rate by 1% to 6%. With three of its top five drugs losing patent protection over the next two years and Lipitor losing its patent protection as soon as 2010, the analyst believes Pfizer will have an uphill battle to generate earnings growth.


Thus, while the analyst’s outlook assumes substantial new product introductions, it also reflects a more competitive overall market for branded pharmaceuticals and therefore slightly lower growth along with faster market share erosion in Lipitor sales after 2010.


In reducing his profitability forecast, Mr. D’Amore notes Pfizer’s operating margins have declined 600 basis points this year to 21.6%. Some of this reduction is due to one-time merger-related costs, but a significant portion of the drop has been driven by lower gross profit margins due to a less profitable mix of products. To combat this drop, Pfizer has undertaken an aggressive cost-cutting program. However, the analyst looks for the profit margin pressures to remain in force.


Crucially, he also points out that Pfizer faces the loss of $14 billion in sales from drugs losing their patent expiration over the next three years.


The bottom line: Who needs damaged goods?


The New York Sun

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