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Billionaires Are Bailing on Pfizer, Inc -- Should You?

By Todd Campbell - May 24, 2016 at 5:41PM

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Wall Street gurus sold Pfizer shares ahead of its failed merger with Pfizer, but growth opportunities might make its shares worth holding onto by Main Street investors.

Image source: Pfizer, Inc.

While following blindly in the footsteps of billionaires is risky, it's always interesting to see what stocks legendary investing gurus are selling, especially when it involves a widely held stock like Pfizer, Inc. (PFE 0.78%). Last quarter, seven billionaires tracked by The Motley Fool sold 19.2 million shares of Pfizer. With billionaires exiting this big pharma Goliath, is it time for you to sell, too?

First, some background

Pfizer has been very busy in the past year. After years of ducking and moving to offset sliding sales tied to the 2011 patent expiration on its megadrug Lipitor, management orchestrated a slate of potentially transformative M&A deals in 2015.

The most notable of those deals was the company's proposed $160 billion tie-up with Allergan plc (AGN), an Irish based company best known for its top-selling drug, Botox.

Pfizer's planned merger with Allergan was complex and would have shifted Pfizer's headquarters overseas in a cost-savings move known as a tax-inversion. Inversions to countries like Ireland, where corporate tax rates are lower, have become more common in the past decade, but they're increasingly drawing ire from the U.S. Treasury Department, which isn't eager to see tax revenue move elsewhere.

In Pfizer's case, shifting to Ireland could have reduced its effective tax rate from the mid-20% levels to mid teen levels. Given that Pfizer's trailing-12-month sales eclipse $50 billion, that drop could have added billions of dollars to the company's bottom line.

However, the Treasury Department put new regulations in place in early April that required a multi-year look-back period when calculating post-merger ownership levels. Doing so made it impossible for Pfizer to clear the ownership hurdle, and as a result, Pfizer's management scuttled the deal shortly thereafter.

Billionaire sellers

Risk that the government could unravel Pfizer's megamerger appears to have been scented out by some of the most highly respected money managers in America.

Last quarter, Andreas Halvorsen, the billionaire behind Viking Global Investors, unloaded 6.3 million shares in Pfizer. The sale of Pfizer by Halvorsen, who boasts a net worth of $2.8 billion, was the biggest by any of the billionaires tracked by The Motley Fool.

Another seller of Pfizer in the quarter was James Simon's Renaissance Technologies. Simon's $14 billion net worth makes him one of the most influential investors on Wall Street, and in Q1, his fund sold 5.6 million shares of Pfizer. Pennant Capital Management and Citadel Advisors also sold off shares. Pennant, which is run by billionaire Alan Fournier, sold 3 million shares in the quarter, while Citadel, the workhorse behind Ken Griffin's $7 billion net worth, sold 2.7 million shares.

Image source: Pfizer, Inc.

Looking forward

Although Pfizer's disintegrating deal with Allergan is disappointing, investors might not want to join these billionaires in selling Pfizer's stock.

Pfizer may not have closed its deal with Allergan, but it did close on a $17 billion acquisition of  specialty drugmaker Hospira last year. That deal catapults Pfizer into a leading position in the burgeoning market for off-brand alternatives to top-selling complex biologic medicine. These generic copycats, known as biosimilars since they're not exact copies of the reference drug, could generate billions of dollars in annual sales  for Pfizer in the next few years.

Further, headwinds associated with Lipitor are easing, and that means  growth in sales of key drugs such as its cancer therapy Ibrance and anticoagulant Eliquis will start to have a more meaningful impact on the company's top line.

Last quarter, expanding use in breast cancer patients resulted in Ibrance sales soaring to $429 million from $38 million a year ago. At the same time, a multibillion-dollar run rate for Eliquis lifted Pfizer's alliance revenue by 80% year over year to $354 million in Q1.

Overall, a stellar first-quarter performance allowed Pfizer's management to increase its full-year sales outlook by $2 billion. The company now expects to generate sales of at least $51 billion in 2016, and if Pfizer delivers on that target,  it should be able to produce EPS of $2.38 or more. Since Pfizer's return to growth provides firepower to fuel other acquisitions (such as its recent purchase of Anacor Pharmaceuticals) and increases its dividend payout, long-term investors might want to stick around.

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Pfizer Inc. Stock Quote
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