Health-care giant Pfizer
Monday, Pfizer and Pharmacia
Pfizer's prescription drugs are household names, and its Viagra, Lipitor, Zoloft, and Celebrex greet us regularly on television. Like diversified health-care giant Johnson & Johnson
Less known in the U.S. is Novartis, formed by the 1996 record-setting merger of drug giants Ciba-Geigy and Sandoz. While its drugs aren't everyday conversation pieces, Novartis peddles familiar consumer products Ex-Lax, Maalox, and Triaminic. In a nod to the importance of the U.S. market and domestic research talent, the company recently said it would almost triple the size of its U.S. facility in Cambridge, Mass., investing $4 billion over 10 years. In the meantime, Enablex will bolster an unspectacular drug development pipeline.
Though Novartis's $24 billion trailing-12-month sales are 70% of Pfizer's, the market rewards it stintingly with a market cap under 50% of its competitor's $190 billion. Both shares sell for a P/E of 21, and both pay dividends yielding about 2%. Each company had recent-year earnings bumps -- Pfizer's from 1999 to 2000, and Novartis's from 2000 to 2001 -- but each has recovered or exceeded those previous highs. Is either a buy?
For investors who want to own a large health-care company as part of a diversified portfolio, each company warrants special caution. Pfizer will be digesting a huge competitor. Despite its history of successful mergers, investors can't ignore academic research strongly suggesting that, in general, large mergers rarely create long-term shareholder value.
The first of Novartis's two challenges is information. As a foreign company whose shares trade in the U.S. as American Depository Receipts, it files only annual (not quarterly) reports with the SEC. The second is that no sales force can match Pfizer's, so Novartis may not be able to extract $1 billion a year from Enablex. This may have kept other buyers from besting the $225 million price.
It's tough to find value right now in the big drug-maker world, though periodic, or Drip, investing is an antidote. Deep-value investor Matt Richey recently counseled to wait on Johnson & Johnson shares until they sell for under 20 times free cash flow, and I opined that Schering-Plough
Your mileage may vary, especially if you have industry expertise. But I'm currently unable to say with comfort that any large drug maker is a deal, satisfying myself for now with the question that has plagued language-challenged investors since 1996: Is it Novar-tis or Novar-tee? Je ne sais pas.