In a much-awaited move, Dow component and Motley Fool Inside Value recommendation Pfizer (NYSE: PFE) announced a long-term operating plan that suggests that the return to double-digit earnings growth is only a short time away. Pfizer followers seemed to like what they heard, pushing the stock up about 3% in trading on Tuesday.
So, should you like what Pfizer had to say?
Key to the company's plans is an effort to reduce annual expenses by about $4 billion (roughly 12%). While it will take time and money to implement this plan (ironic that you have to spend money to spend less money), the total magnitude handily surpasses the $2 billion to $3 billion that most analysts were expecting.
Importantly, most of the savings will be coming out of a sales reorganization and an overall streamlining of operations. What's not being touched is R&D, and the company expects to spend around $8 billion in 2005. To put that number in perspective, that's almost more than Abbott Labs (NYSE: ABT), Merck (NYSE: MRK), and AstraZeneca (NYSE: AZN) spent combined on R&D in 2004.
While cost-cutting is all well and good, you can't cost-cut your way to top-line growth, and that's where things get a bit stickier for Pfizer. Upwards of $9 billion in revenue could be lost over the next four years as generics emerge, and it's impossible to say today how much of its past glory (and sales) COX-2 inhibitor Celebrex will regain. On top of that, Pfizer faces a patent challenge on Lipitor that, although unlikely to succeed, does still represent an ongoing risk factor.
What's more, it's hard to say today how much of that revenue can be recouped by new products in the late-stage pipeline. The company's Exubera inhaled insulin -- to be co-marketed with Sanofi-Aventis (NYSE: SNY) -- is a major wildcard, as nobody has a solid idea how popular the concept will be (assuming it's approved).
Furthermore, torcetrapib (for cholesterol) and sutent (for cancer) look highly promising, but there will be no shortage of competition. While a combination of torcetrapib and Lipitor could be powerful, Bristol-Myers Squibb (NYSE: BMY), Merck, and Schering-Plough (NYSE: SGP) all will have something to say about that.
When you get to the bottom of it all, Pfizer management expects a pretty anemic 2005, followed by double-digit growth in 2006 and 2007. Along the way, the company will continue to invest heavily in R&D, explore potential partnerships, and still maintain its ability to return capital to shareholders (through dividends and stock repurchases).
As Pfizer management itself mentioned, Pfizer is facing a transition, and the company has been through this before, successfully, I might add. Although Pfizer is not my tip-top No. 1 pick in the pharmaceutical space, I can't imagine that patient investors buying today will regret the decision in 2008 and beyond. In the meantime, keep an eye on the R&D efforts -- $8 billion a year has got to be worth something down the line.
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Fool contributor Stephen Simpson owns shares of Sanofi-Aventis. Fool rules are here. What's more, he would like to apologize to his pformer English teachers pfor that headline.
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