Drug companies often face the need to come up with new medicines, especially as patents on older pharmaceuticals expire. Dow member Pfizer (PFE - Free Pfizer Stock Report), for example, estimates that sales losses to generic competitors of Lipitor, Viagra, and Celebrex will amount to $3.5 billion in 2015. Companies look to develop drugs, but their efforts aren’t always successful. Accordingly, some drug manufacturers, flush with cash, attempt to acquire smaller companies—and their pipeline of drugs under research and development. It was with this in mind that in early February, Pfizer agreed to acquire Hospira (HSP) for more than $15 billion in cash. Pfizer is trying to expand its presence in biosimilar (not generic) drugs, which Hospira can provide. Specialty Injectable Pharmaceuticals provide the latter company’s largest segment of sales. The companies expect the transaction to close in the second half of 2015. More information about the deal can be found in the Commentary section of the Value Line Investment Survey report.
This deal is big, but not nearly as large as the one Pfizer attempted in 2014. The company made a $120 billion cash-and-stock offer for a British drug company, AstraZeneca (AZN), but was rebuffed. The last major takeover that Pfizer completed was the buyout of Wyeth Pharmaceuticals in 2009 for $68 billion in cash and stock. The company makes relatively small acquisitions from time to time, such as its $3.6 billion cash purchase of King Pharmaceuticals in 2011. And Pfizer made a noteworthy transaction in February of 2013, when it spun off its animal health business into a new company, Zoetis (ZTS).
Turning to the Value Line report again, the data indicates that times have been tough lately for Pfizer. Profits declined 15% in 2014, to $1.41 a share. (Indeed, the array displays the company’s erratic earnings performance over the past several years.) The aforementioned top-line losses from patent expirations are one problem. Another is the strengthening of the U.S. dollar, since much of Pfizer’s sales are in foreign countries. The Graph shows that the stock price didn’t move much in 2014.
The Commentary box states that management’s GAAP earnings guidance for 2015 is $1.37-$1.52 a share. Despite the possibility of lower profits in 2015, the board of directors raised the quarterly dividend by $0.02 a share (7.7%) in the first quarter. The Quarterly Dividend box shows a pattern of consistent dividend growth in recent years. As can be seen in the Top Label, in early April, Pfizer stock was yielding more than 3%. This dividend yield compares favorably with the market average of 2%. Many investors own the blue chip partly for dividend income. However, the Array shows that the dividend was cut in 2009. We believe the payout is not at risk, especially since it was hiked earlier this year.
The Current Position box shows that the company had more than $36 billion in cash at yearend 2014. This gave it the wherewithal to agree to the Hospira purchase and raise the dividend. The Array illustrates that the number of shares outstanding has been declining since 2009, an indication that Pfizer has been repurchasing its stock, and our estimates and projections suggest that the company will continue to do so. Even with the reduction in common equity, the Capital Structure box demonstrates that the capitalization ratios are still sound. As of yearend 2014, long-term debt made up 31% of total capital.
The Ratings box shows that Pfizer has our top Financial Strength rating of A++ and that its stock is very stable, with a high Price Stability Index (95 out of 100). Too, the Ranks box indicates that the Dow component is rated 1 (Highest) for Safety. However, it also shows that the equity is ranked 4 (Below Average) for Timeliness. The stock’s relative price/earnings ratio, as can be seen in the Top Label, implies that its valuation is higher than it has been in the past dozen years, as displayed in the Array. Meanwhile, the Projections box indicates that this issue’s total return potential to 2018-2020 is subpar, compared with the market median of 10%, but might still appeal to some investors on a risk-adjusted basis. At this point, the stock is best suited for conservative accounts seeking income and dividend growth potential.