Is It Time to Buy Pfizer Inc.'s Stock?

Since the recession ended, shareholders in Pfizer (PFE 2.40%), the world's largest pharmaceutical company by revenue, have seen their shares more than double. A combination of high-branded drug margins coupled with the expectation that the Affordable Care Act, better known as Obamacare, will translate into a long-term positive for the company have pushed its stock back near the $30 per share mark.

However, if you were to pull back and look at the bigger picture, you'd see a stock that hasn't gone anywhere in nominal terms for 15 years.

PFE data by YCharts.

The big question investors need to ask themselves with Pfizer about halfway in between in low and high of the past 15 years is whether or not it can head higher from here. This is a question I aim to answer here today.

Before I tackle the positive catalysts and negative headwinds that could move Pfizer's stock, I think it only fair to mention that the stock market is like a two-way street. Stocks can just as easily head up as they can head down. It's the collective opinion of millions of investors, both on and off Wall Street, that determine where a stock heads next. In other words, just because I'm making a call one way or another doesn't mean it will necessarily come to fruition, so make sure to formulate your own opinions and investing thesis as you read along.

Pfizer by the numbers
The publicly traded biopharmaceutical sector is often a stomping ground for steep cash burn rates and clinical-stage pipelines. Because of this, financial metric comparisons in this sector often have little value. However, when we're talking about the world's largest pharmaceutical company and some of its equally impressive peers, digging into financial metrics such as projected growth rates and profit margin can actually tell us a lot about how investors are valuing these companies.

Here are the important financial figures you need to know for Pfizer and its peers:

Source: Yahoo! Finance, TTM = trailing 12 months.

Although the patent cliff is a universal concern affecting all large pharmaceutical stocks, we can certainly make out some differences above.

Perhaps the two figures that stand out the most above are Pfizer's bottom ranking in terms of five-year growth rate and its top-tier profit margin relative to its peers.

When it comes to future growth prospects, both Pfizer and Merck are dealing with a fairly steady near-term drop-off in revenue. Merck lost its exclusivity on asthma blockbuster Singulair in 2012, and it'll soon (2016 and 2017) be facing the loss of exclusivity on cholesterol blockbusters Zetia and Vytorin. Similarly, Pfizer has languished since losing exclusivity on cholesterol drug Lipitor, the best-selling drug of all time, and it's set to see its patent on $3 billion per year fibromyalgia drug Celebrex expire in December of this year. Combined, the introduction of generics and loss of blockbuster drugs has hurt Pfizer and Merck's margins.

In contrast, Novartis and Sanofi have angled their existing and developing pipelines at high-growth therapeutic areas like oncology, as well as placed extra emphasis on emerging markets, which has led to more robust growth targets from Wall Street.

Source: Novartis.

On the flip side, Pfizer's premier profit margin looks to be a reflection of its minimal reliance, relative to its peers, on generic drugs, and its stringent cost-cutting efforts, which boost its profitability. Comparatively, Sanofi and Novartis both receive a modest chunk of their sales from their generic drug subsidiaries, and generic drugs often come with notably lower margins because of their significantly lower pricing than innovator drugs.

When it comes to forward P/E and dividend yield, there aren't any eye-popping differences between these four companies.

Is Pfizer a buy?
Now that we've taken a closer look at the number behind Pfizer and its peers, let's double back to the original question: Is Pfizer's stock a buy?

Though I'm always willing to reassess my opinion when it comes to pharmaceutical stocks, my answer right now is no. Allow me to explain my reasoning.

On one hand, I'm very excited about the potential for the company's first-line estrogen-positive, HER2-negatve breast cancer drug palbociclib. Palbociclib, when administered with Novartis' Femara, delivered progression-free survival in the PALOMA-1 trial of 20.2 months compared to just 10.2 months for patients treated only with Femara. Overall survival wound up not being as impressive as investors thought it would be -- improving just 4.2 months (37.5 months versus 33.3 months) -- but it should still be enough, in my opinion, to garner an approval in the U.S. and the EU. When all is said and done, palbociclib could be a drug that generates $5 billion or more in annual sales.

But, as I've opined before about the pharmaceutical sector, one drug can't save a company the size of Pfizer when patent losses on blockbuster drugs are streaming in on a somewhat regular basis. Lipitor, Detrol, Viagra, Effexor, and Spiriva (in select countries) have already lost their protection from generic competition over the past couple of years. This coming December, Celebrex will be exposed to generic competition, and in 2018, Pfizer's top-selling nerve and muscle pain drug Lyrica will face its own patent cliff. At this point, it would take a piñata full of newly approved therapies and successful drug launches to counter the monstrous patent cliff Pfizer is facing.

Source: David Goehring via Flickr.

I also worry about Pfizer reaching for growth. The company's $68 billion buyout of Wyeth, announced in 2009, was supposed to alleviate concerns about Pfizer's eventual patent cliff, drive innovation for years to come, and result in notable cost-savings. Yet, five years later, Pfizer's top line continues to languish. Pfizer can continue to keep a lid on its costs, but at some point, investors are going to want to see organic growth.

Pfizer's recent (unsuccessful) pursuit of AstraZeneca, for example, concerns me. Pfizer believed the cost synergies of combining their research and development segments, along with the tax savings of relocating overseas to the U.K., could have save the company north of $1 billion annually. But, if you look beyond just the cost savings, AstraZeneca's forecasted five-year growth rate is actually negative. Reaching for growth simply won't guarantee that Pfizer's stock will head higher, and investors need to realize this.