Ready or not, here come the 13F filings with the Securities and Exchange Commission.
Once every quarter institutional money managers with more than $100 million in qualifying assets under management are required to disclose their holdings with the SEC. For Wall Street and investors like you and me, it allows for an inside look at what the world's most-renowned billionaire money manager have been up to over the three-month period.
Earlier this week we hit the aforementioned 13F deadline, meaning a slew of new filings hit the wires detailing the buying and selling action of money managers between April 1 and June 30, 2016. As expected, there were plenty of brand-name battleground stocks that were bought and sold with some regularity. But among the crowd of well-known companies stood one stock that was repeatedly jettisoned from the portfolios of billionaire money managers. This seemingly "most-hated" stock among billionaires during the second quarter is none other than pharmaceutical giant Pfizer (NYSE:PFE).
Pfizer was a prime selling target in Q2 by billionaires
According to the 13F filings, three billionaires bid adieu to Pfizer during the second quarter. These were:
- Andreas Halvorsen, the money manager at Viking Global, who sold off 1,117,592 shares of Pfizer during the second quarter. Viking's position had been held since the fourth quarter of 2015.
- David Tepper, billionaire money manager at the Appaloosa Management, who sold 2,512,250 shares of Pfizer that had also been held since Q4 2015.
- Barry Rosenstein, money manager at JANA Partners, who sold a whopping 13,460,304 shares of Pfizer. To complete the trend, JANA had been holding Pfizer shares since Q4 2015.
Why the hate for Pfizer? More than likely the source of optimism and subsequent frustration from billionaire money managers can be traced to Pfizer and Allergan (NYSE:AGN) terminating their merger in the first week of April.
Winding back the clock a bit, the merger of Pfizer and Allergan was expected to be a complete game-changer. It was the biggest M&A deal ever, with the two companies expected to really tack on growth toward the end of the decade, as well as vastly expand their current product offerings. Most importantly, the deal was going to allow for around $2 billion in annual cost savings. This last point is what caught the attention of regulators.
The deal was being structured as a tax inversion. In plain English, Pfizer wanted to move its corporate headquarters to Ireland, which has a substantially lower corporate income tax rate than the United States. For that to legally happen, Allergan, the smaller company, had to agree to buy Pfizer, the larger company. The deal met the, at the time, stipulations of a legal tax inversion in that it was an all-share deal, and Allergan would wind up owning between 40% and 60% of the combined entity when all was said and done.
The Treasury department squashes "PfizerGan"
But something incredible happened during the first week of April: the Treasury Department got involved. With one fell swoop the PfizerGan deal was as good as dead after the Treasury Department altered two key rules on tax inversions that were vital to the merger's going through.
First, the Treasury department stuck it to serial inverters like Allergan by disregarding the valuations of companies acquired on a trailing three-year basis. Within the past three years Allergan had acquired Forest Laboratories, Actavis, and Warner-Chilcott. The move, in effect, wiped more than $50 billion off of Allergan's deal-based valuation, putting it well below the 40% ownership threshold for a tax inversion and headquarter redomiciling to take place.
Secondly, the Treasury Department tightened standards surrounding earnings stripping, which is the practice of lending to U.S. subsidiaries, and then taking the interest as a deduction to lower a company's U.S.-based tax liability.
Without the ability to save more than $1 billon in corporate income taxes annually, the deal died, and so did billionaires' love affair with Pfizer.
Billionaires may have sold a long-term winner
Yet the irony of it all is that Pfizer has seen far scarier days. Falling off the patent cliff and losing Lipitor's exclusivity was a time when I'd have expected billionaire investors to turn the ship in the other direction full steam. If you look at what Pfizer has going for its pipeline today, there's no reason to be running for the sidelines.
To begin with, Pfizer has a fast-growing blockbuster is cancer therapeutic Ibrance. During its Q2 report, Pfizer announced that Ibrance sales leaped more than 200% year over year to $514 million from $140 million. Let's not forget that this drug essentially doubled progression-free survival in breast cancer patients during clinical trials to 20.2 months from 10.2 months for the placebo. Chances are decent with this type of clinical performance that Ibrance will find a way to expand its label and push its peak annual sales possibly as high as $4 billion to $5 billion.
Pfizer also has a dominant pneumococcal vaccine on the market in Prevnar 13. Although Prevnar sales fell 15% on an operating basis in Q2, the vaccine is still on pace for between $5 billion and $6 billion in annual sales this year. The Centers for Disease Control and Prevention made Prevnar the recommended pneumococcal vaccine back in Sept. 2014 for people ages 65 and up, which should provide a pretty steady base of returning patients in this age group for years to come.
Pfizer's pipeline can't be overlooked, either. As of February, Pfizer was working with 90 clinical trials and/or registrations under way. This doesn't take into account the multiplicity of preclinical and discovery stage drugs currently being worked on. In addition to its standard areas of focus, such as oncology, rare diseases, and vaccines, which are all high-growth indications, Pfizer has a pretty deep pipeline of biosimilar drugs that could undercut the pricing of branded therapies, disrupting major blockbuster drugs and possibly netting it a big increase in sales.
Pfizer's current PEG of 2.2 may not be indicative of deep value in traditional fundamental metrics. However, looking out over the next five to 10 years there appear to be multiple pipeline catalysts, not to mention a current 3.4% yield, giving investors every reason to consider buying, not selling, Pfizer.