3 Reasons Pfizer's Recent Drop Could Make It a Buying Opportunity

Image source: Getty Images.

Drug giant Pfizer (PFE -0.85%) is back full circle. After years of Wall Street speculation about whether the company would split into stand-alone parts, CEO Ian Read recently announced management's decision: no split.

You could almost hear the collective gnashing of teeth by investment bankers, who thereby lost millions of dollars in transaction fees. But let's not waste any tears on that group, because this stock is back in the game. With Pfizer down almost 10% from its August high, shares are approaching the point where they present an opportunity for long-term investors. That's particularly true for income seekers, because Pfizer's dividend now yields 3.5%, the third-highest dividend in drug stocks.

Of course, like practically every big pharma, Pfizer has struggled with the loss of exclusivity on key drugs -- notably Lipitor, once the best-selling drug of all time. But Pfizer has introduced a number of fast-selling therapies recently, and its pipeline and mergers and acquisitions provide major growth opportunities.

Let's quickly review three reasons to buy as well as two near-term risks.  

Appealing dividend for yield-starved investors

Only two major drug manufacturers offer a higher dividend yield than Pfizer: GlaxoSmithKline at 5.1%, and Sanofi at 4.4%. But there are questions about the safety of Glaxo's superior dividend, with its lead drug Advair facing the risk of generic competition in one to three years. And Sanofi's stock is down in the dumps, with its key diabetes market franchise under pressure from heavy competition and patents on best-seller insulin Lantus having expired.

Meanwhile, a 3.5% dividend is nothing to sneeze at, not in today's yield-starved world. While nothing beats Johnson & Johnson's 53-year track record of dividend increases, here's Pfizer's comparative performance on other key dividend metrics:

Data source: FactSet. Table by author.

Blockbuster revenue from superstar drugs

Pfizer's new drugs are providing more than protection against various diseases; they are providing generous protection for Pfizer's growth and earnings as well.

Pfizer's heavy-hitter breast cancer med Ibrance looks set to be a $4 billion drug. Last quarter, it generated $514 million globally, which was not too shabby for its fourth quarter of commercial availability. Assuming Ibrance can be expanded to new indications -- which seems likely based on its outsized success in its phase 3 Paloma trials -- this drug is just getting started.

Also showing up strong last quarter, and likely in future quarters, was Eliquis, for stroke prevention, and Xeljanz, for rheumatoid arthritis. But it's Pfizer's Prevnar-led vaccine franchise that is doing the heavy lifting right now. Going back to full-year 2015, the franchise notched $6.25 billion in revenue. Comparatively, Merck KGaA's HPV vaccines trailed at a far-distant second place of $2.47 billion a year.

Pfizer's vaccines showed huge 40% year-over-year growth (or more) each quarter in 2015. While growth slowed in 2016, Prevnar received expanded FDA approval in adults 19 to 49 this July. That could see it begin ramping back up again.

Pfizer's fast-growing therapies are not just making up for patent losses; they led the new-drug division to 17% operational growth year over year in the second quarter. Overall, the division's revenue clocked in at $13.1 billion, a year-over-year change of 11% over $11.9 billion in the same period last year.

Pipeline and acquisitions recharging the batteries

Long-term growth in a company such as Pfizer is built around its pipeline and acquisitions. Fortunately for the drug maker, it has one of the largest pipelines in the industry, with over 90 clinical trials ongoing.

Of the nine drugs in registration phase, several should provide near-term catalysts. Avelumab (co-developed with Merck KGaA) has a blockbuster sales potential of $4 billion to $6 billion, although Merck KGaA would claim the lion's share of the revenue. Meanwhile, a drug from Pfizer's buyout of Anacor Pharmaceuticals, eczema treatment crisaborole, could see sales of $2 billion, with a regulatory decision in January 2017.

In terms of other acquisitions, the biggest headline in biotech in recent weeks was Pfizer's $14 billion buyout of Medivation. The prize netted was Xtandi, a prostate cancer drug which saw $2.2 billion in sales over the past year. Pfizer has a bold plan for growth in oncology, and with Xtandi's sales projected to reach $4.8 billion by 2020, the company now owns two of the top 10 leading cancer drugs. 

Image source: Pfizer.

And then there's Pfizer's $17 billion acquisition of biosimilars giant Hospira, which is already paying off big time. Thanks to Hospira, Pfizer's slower-growing essential health division posted 19% operational growth in the last quarter year over year.

What could go wrong? Two words of caution

Pfizer presents a company-specific risk in CEO Ian Read's ill-advised hunger for megadeals. Read took a proverbial pie in the face when Pfizer's 2014 leap at British-based AstraZeneca failed. Seemingly undeterred, that was followed by another ill-fated megamerger attempt with Ireland's Allergan.

Fortunately, more recently, Read has been focusing on smaller bolt-on acquisitions, such as Anacor Pharmaceuticals and Medivation. But there's no guarantee he has actually learned.

The other risk is that Pfizer has been fending off relentless pressure from analysts to break up for years, so we could see analyst downgrades coming. Since these tend to come in groups, that could pressure shares. On the other hand, earlier this year Pfizer approved a $5 billion accelerated stock repurchase, which could help put a floor under the share price.

All in all, the catalysts for outperformance are out there for this blue chip. And for those who aren't overly concerned with the chance for more downside on the short term, I'd say -- don't dive in headfirst, for heaven's sake. But consider dipping in a toe -- the water should be fine.