Pfizer (PFE -0.19%) certainly has its fair share of critics on Wall Street. The underlying reason is that the drugmaker's shares have dramatically lagged behind the high-flying pharmaceutical industry during the past decade (and for good reason).
However, Pfizer's stock has started to show some signs of life this year, gaining a healthy 12% year to date. While some long-suffering shareholders might be tempted to sell following this spike, the usually cited reasons for doubting this big pharma stock appear to be starting to lose credibility. So, with this theme in mind, here is a look at three terrible reasons to sell Pfizer's stock right now.
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1. More key drugs going off-patent
One of the reasons skeptics cite for avoiding Pfizer's stock is the company's never-ending battle with the patent cliff. In the past 12 years, for instance, the drugmaker has lost exclusivity for a series of megablockbusters, including Celebrex, Lipitor, Viagra, and Zoloft.
Now the company is set to face yet another major challenge with the loss of exclusivity for the top-selling pain medication Lyrica. That's a big deal because Lyrica has consistently made up close to 10% of Pfizer's annual revenue.
Last July, Pfizer decided to reorganize in an apparent effort to prepare for this major loss of exclusivity. Starting next year, the drugmaker plans on packaging all of its former star medicines into an Essential Medicines unit. Pfizer's emerging biosimilar franchise will also be removed from the Essential Health segment that presently houses off-patent legacy products. Pfizer seems to be building a firewall against Lyrica's upcoming patent expiration with this product rehousing.
Investors, however, shouldn't fret too much over this forthcoming headwind. By lumping all of these legacy products into one unit and excising the single growth driver (biosimilars), Pfizer seems to be gearing up to spin off this troublesome segment. To do so, the drugmaker will arguably need to make a large acquisition sometime soon to shore up this unit's top line, but a spin-off now seems inevitable.
2. Drug pricing controversy
Pfizer has been at the epicenter of the politically charged drug pricing debate in the United States, thanks to its regular price hikes on older medicines and its top dog position in the pharmaceutical space. As a result, President Trump specifically targeted Pfizer earlier this year in his criticism of the industry's widespread practice of raising drug prices well above the rate of inflation every year. Pfizer responded by placing a moratorium on price increases until either the president's "blueprint" for lower drug prices comes to fruition or the end of the year.
The good news is that the possibility of lawmakers enacting draconian measures, such as hard caps on specialty medicines, no longer appears to be on the table. Instead, Trump is reportedly considering a market-based approach that revolves around greater transparency at every level, as well as lowering the incentives that currently drive these regular price increases. Neither of these initiatives will dramatically impact Pfizer's top line.
The fact of the matter is that Pfizer only makes price increases on a small portion of its massive product portfolio and none of these medicines will be subject to game-changing price discounts if and when Trump's proposed system goes into effect. Furthermore, there's also a solid chance that the president's push for lower drug prices never even materializes. Lawmakers, after all, are far more preoccupied with other matters like the midterm elections.
Stated plainly, the movement to radically alter the drug pricing system has been steadily losing momentum to the point where this controversy is arguably no longer a major headwind for big pharma. This situation could change with a new administration -- or significant turnover in Congress -- but there's no reason to fear this particular risk factor at present.
3. Capital allocation concerns
Under CEO Ian Read, Pfizer has consistently spent far more on shareholder rewards like share repurchases and dividends than on pure research and development. That fact has ruffled the feathers of some shareholders because the company has arguably been slow to move past the ravages of the patent cliff. After all, Pfizer's R&D spend as a percentage of total prescription drug sales is among the lowest within the industry.
Read's laser-like focus on the bottom line has arguably come at the expense of the drugmaker's top line. As proof, Wall Street is forecasting Pfizer's revenue to rise at a rather modest 2% compound annual growth rate over the next six years, which is one of the slowest growth rates among large-cap drugmakers. And that's a big reason why Pfizer's stock has been stuck in a rut for the better part of a decade.
All that being said, Pfizer has never been known for its R&D platform, but rather as a cash cow that prefers to buy revenue through bolt-on acquisitions. And with this reorganization set to kick off in 2019, this pharma titan will likely go big game hunting again in the not-so-distant future.
As a prelude to a spin-off of its legacy medicines segment, Pfizer needs to tack on additional weight to this unit to make it a viable stand-alone business. The company, in turn, will also need to bulk up its innovative business to maintain leverage in drug pricing negotiations with third-party payers.
As a result, Pfizer could very well end up making two sizable acquisitions within the next few years. So, while the criticisms over Pfizer's rather conservative use of its cash flows are indeed warranted, those days seem likely to be coming to an end.
Pfizer, after all, can no longer kick the can down the road on its patent problems, making it high time to split the company. That long-awaited event should unlock tremendous value for shareholders and transform Pfizer into a top-performing stock in the years to come.
