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Pfizer's Newest Acquisition Target

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Pfizer (NYSE: PFE  ) reduced its 2012 revenue guidance, but at least it was for a good reason.

The pharma giant decided to cut potential acquisitions from its revenue guidance and instead spend the money on share buybacks. The board increased its share repurchase authorization to $9 billion. The company plans to make $5 billion of those share repurchases this year.

Essentially, Pfizer is saying that it can get a better return by investing in itself and reducing its share count than by purchasing drugs that increase revenue and earnings.

While that's bad news for takeout targets like Clinical Data (Nasdaq: CLDA  ) , Amarin (Nasdaq: AMRN  ) , or Dendreon (Nasdaq: DNDN  ) that have drugs on the market or close to it, I think it's probably a prudent move given how cheap the shares are.

Trading around 8.7 times next year's expected adjusted earnings, the buyback should have a positive effect on earnings. Especially since every dollar it spends on share repurchases saves more than $0.04 annually in dividends it doesn't have to pay. I doubt it's making that much leaving the cash sitting in the bank.

I was less impressed with Pfizer's other announcement yesterday that it was slashing its R&D spending forecast for 2012. While that helps raise 2012 earnings, it comes at a cost down the line.

Pfizer's new CEO Ian Read wants to concentrate on research areas that offer the best return on investment. While that sounds good in theory, it'll be awfully hard for a company the size of Pfizer to grow without having its hand in any and all research areas.

Returning capital to shareholders through buybacks is only useful if the company's stock is cheap. And the stock is only cheap at these levels if Pfizer can grow after Lipitor starts to see generic competition. Getting paid a 4.4% dividend yield is OK if there's growth ahead, but it isn't enough to justify owning the company if Pfizer is content letting patent expirations overwhelm new drug launches.

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Pfizer is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

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  • Report this Comment On February 04, 2011, at 7:57 PM, theslice wrote:

    It's clear most everyone at Motley Fool, bloggers and staff included, are not good at researching biotechs at all.

    You also failed to mention all of the following:

    1- Side effects mainly lasted in the initial titration period.

    2- It's faster acting than most currently marketed drugs.

    3- Sexual side effects comparable to placebo.

    4- Patent cliffs are going to create gaping holes in big pharma pipelines.

    5- It's the first dual action mechanism antidepressant.

    6- It's efficacy was equal to or better than Lexapro based on their MADRS scores

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