After Missing Earnings, Is Pfizer a Good Value?

Pfizer's first quarter comes up a little weak, but investors care far more about the bid for AstraZeneca

May 5, 2014 at 4:15PM

When Pfizer (NYSE:PFE) last reported earnings I was pretty ambivalent about the stock, and since that late January piece the shares have lagged both the broader market and pharma industry peers like Merck, Lilly, and Novartis. It's not as though the company has been sitting still either, what with positive clinical updates on its Prevnar vaccine and palbociclib oncology drug. Dwarfing all of that is the potential megadeal for British pharma company AstraZeneca (NYSE:AZN). Pfizer needs to guard against overpaying in this potential deal, but these shares are getting closer to an interesting entry point for long-term investors.

Revenue comes in quite weak
It is probably lucky for Pfizer that investors are far more interested in the possibilities of a higher bid for AstraZeneca deal than the details of this quarter, as it was not a particularly strong result. Revenue fell 9% year over year, as the company missed estimates by more than a 6%.

If that sounds like a large miss for a company like Pfizer, it is. That's particularly so given that weekly prescription tracking services allow analysts to dial in the U.S. sales pretty well. In any case, the double-digit misses relative to consensus were all in older drugs like Celebrex, Lipitor, Viagra, and Sutent, but Lyrica sales (up 2%) and Prevnar (flat) also both missed expectations. Pfizer also reported results according to its new corporate structure, with Global Established Pharmaceuticals down 10%, Global Innovative Pharmaceuticals down 4%, and Global Vaccines, Oncology, and Consumer up 2%.

The good news in the revenue miss is that Pfizer did see a better-than-expected mix and relatively stronger margins. Gross margin improved 0.40% against a sell-side expectation of a 2.1% worsening. Operating income fell 13%, only slightly worse than the average estimate. Pfizer's overall reported operating margin was 41%, while the segment margins were 25% for GIP, 25% for VOC, and 56% for GEP.

Still no clear path on palbo
The prospective AstraZeneca deal does indeed have enormous potential to transform Pfizer, but in terms of "organic" prospects, the path forward for palbociclib is the most important near-term item on Pfizer's agenda. This CDK 4/6 inhibitor nearly doubled progression-free survival in combination with letrozole, but not enough events had accrued by the earlier reporting deadline to give an overall survival readout.

Lilly and Novartis are close behind with their own CDK 4/6 inhibitors (bemaciclib and LEE011, respectively), which makes the regulatory pathway discussion all the more important. Pfizer, and Pfizer bulls, had been hoping to file for approval on the basis of phase 2 data (all prior ER+/HER2- drugs were approved on PFS data), a decision which would likely give Pfizer at least a year's head start on its rivals and on its way toward multiple billions of dollars a year in potential sales.

AstraZeneca remains the $100 billion elephant in the room
Pfizer has formally made a $106 billion offer to acquire AstraZeneca, an offer that AstraZeneca rejected despite the 39% premium it represented to AstraZeneca's price before Pfizer's first overture to the company. With a tax inversion deal offering Pfizer the possibility of taking advantage of the U.K.'s lower 20% statutory rate and a permanent R&D credit, there are definitely reasons for Pfizer to consider a higher bid. It's also worth noting that there really aren't too many other options for Pfizer if it wants a tax inversion deal, as there aren't many companies big enough where the non-US company's shareholders would still hold 20% of the combined company.

It's not just about taxes, though, nor is it about the possibility of trimming redundant SG&A and R&D costs (something Pfizer may have to be careful about given the interest of the U.K. govt in this deal). Pfizer can leverage AstraZeneca's respiratory and diabetes franchise across its own primary care efforts, and there are a number of attractive early stage immuno-oncology assets within AstraZeneca's pipeline. With both AstraZeneca and Allergan on the receiving end of unsolicited proposals, this could be a very interesting time in Big Pharma with white knight bids or mergers of equals designed to avoid these takeovers.

The bottom line
Even with the headline and execution risk that the proposed AstraZeneca deal (or a higher bid) would bring, I find myself liking Pfizer a little more than before. I'm not convinced that this three-way split of the business really adds value, but I do have more conviction about the long-term value of products like Prevnar and pablociclib. With the shares seemingly priced for a high single-digit return, I'd start considering these shares are a relative value option in the large pharmaceutical space, even if Pfizer's organic growth prospects will be challenging absent a large-scale acquisition.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Stephen D. Simpson, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information