One of the best ways to develop a picture of any company involves the SWOT analysis -- a look at a company's strengths, weaknesses, opportunities, and threats. Today, I'd like to focus on Pfizer (NYSE: PFE ) as it continues to integrate Wyeth.
- Size. The Wyeth buyout created a mammoth drugmaker that can use economies of scale to fatten its margins. That strategy worked for Johnson & Johnson (NYSE: JNJ ) , although J&J has mostly used smaller acquisitions to grow externally.
- Cash. With more than $17 billion in the bank, and free cash flow of more than $15 billion last year, Pfizer has the ability to service its debt, pay a dividend, and still have cash left over to buy its way to drug pipeline bliss.
- Size. The integration of large acquisitions -- including a pair by Pfizer -- hasn't exactly resulted in stellar return on equity.
- Dependent on research and development. Each new drug can cost as much as $1 billion to develop, with no guarantee of success. Enough said.
- Developing countries. Like many of its pharma brethren -- GlaxoSmithKline (NYSE: GSK ) , sanofi-aventis, and Abbott Labs (NYSE: ABT ) in particular -- Pfizer has its sights on developing countries for a revenue bump. The room to expand is certainly there, but don't expect high margins until the countries actually develop enough to pay full price.
- Pipeline. Pfizer hasn't had the best luck lately, but it still has plenty of drugs in its pipeline with blockbuster potential.
- Generics. Pfizer has sold generic versions of its own off-patent drugs through its Greenstone division for years, but the company has driven further into generics over the last few years. I doubt Pfizer will ever be as major a player as Teva Pharmaceuticals (Nasdaq: TEVA ) or Novartis (NYSE: NVS ) , but hitting a few niches, including biosimilars, could offer some growth -- albeit at lower gross margins.
- L-day. The company's behemoth drug, Lipitor, will see generic competition toward the end of next year. The addition of Wyeth's revenue has brought the impact of Lipitor down to about 16% of revenue (year-to-date), but that's still quite a chunk to lose in the not-too-distant future.
- Next-generation drugs. Expiring patents aren't the only threat to sales. Competition from newer, better drugs is equally disheartening. VIVUS (Nasdaq: VVUS ) is developing a new erectile dysfunction drug that could compete with Viagra, and several companies are developing oral anti-inflammatory drugs that could knock off Enbrel, which requires a needle poke for delivery.
All in all, I think Pfizer's strengths and opportunities will overcome its weaknesses and threats, but that won't happen immediately. The expected drop in revenue from loss of Lipitor will likely be felt before any potential replacements finish ramping up. The nice dividend, however, could make the wait worthwhile -- especially if Pfizer increases it.
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