January 15, 2016
By Mark Terry, BioSpace.com Breaking News Staff
Now that Pfizer and Allergan are merging, analysts are trying to decide whether investors should buy, sell or hold.
This isn’t exactly new. Analysts have been trying to figure that out since the deal was announced. Tom Taulli, writing for InvestorPlace, reminds investors that since October, Pfizer stock has lost about 14 percent of its value. Baseline investor advice is to buy low and sell high, so in theory this would be a good time to buy Pfizer.
Taulli, however, notes that because it’s a presidential election year, there’s a lot of discussion and posturing regarding drug prices and reforms regarding a variety of pharmaceutical-related issues, including tax inversions. That, he says, could “ultimately squeeze margins.”
In addition, large health insurance companies have been consolidating in order to control costs, which inevitably brings a focus on drug prices and reimbursement. He does say, “Then again, there is nothing new about all this. And yes, investors have already been discounting the valuation of Pfizer stock anyway.”
Alexander Valtsev, however, writing for Seeking Alpha, brings up Pfizer’s potential problems with patent cliffs and how they will affect sales, noting that Lipitor, Norvasc, Viagra, and Xalatan are all facing patent expirations, either in the U.S., Europe, or Japan. However, although a lot of big drugs lost patents in the last two or three years (Viagra, Enbrel, Celebrex, Lyrica in the EU), quite a few drugs will be protected through 2020 or later (Chantix, Eliquis, Ibrance). “Although most patents’ expiration dates are after 2020,” Valtesv writes, “patents on Enbrel, Celebrex, Zyvox, and Lyrica are expiring soon and they represent a significant portion of the company’s current revenue stream (~7.8%, ~5.4%, ~2.7%, and ~10.4%, respectively, totaling to ~26.3%).”
Valtsev pulls together a fairly complex analysis of DCF, zero-growth, and comparative analysis to determine a reasonable price range for Pfizer’s equity. He concludes, saying, “Despite the good results of the comparative analysis, I am concerned about Pfizer’s free cash flow generation abilities in the mid-term. The company needs to invest more money in capital expenditures (CapEx) and research and development because patent revenues, which represent more than 25 percent of total sales, are going to decline rapidly in the future.”
He also points out that his DCF and zero-growth analysis “show that the stock is overvalued. However, I would not short the company right now because the dividend yield is still high at the moment and the company may show natural growth in the future.”
Taulli is focused more on what Allergan’s pipeline will do for the merged company’s value. He notes that there “should be strong financial synergies in terms of cost cutting and tax savings.” Pfizer will also have a significant tax cut as it shifts its headquarters to Dublin. So there will be more cash, but he also predicts better top-line growth, which is likely to bolster Pfizer’s stock price.
“First of all,” Taulli writes, “the company should benefit by selling Allergan’s massive product line, which includes top sellers like Botox, within the global distribution footprint of PFE (less than 20 percent of Allergan sales are outside the U.S.).”
Allergan and Pfizer have very promising pipelines. One, which is being developed with Merck KgaA , is Avelumab for cancer. It is being developed to treat non-small cell lung cancer (NSCLC) and other solid tumors. It is currently being evaluated in a Phase III trial for NSCLC.
The Wall Street Journal recently suggested that Allergan’s pipeline had the potential to bring in over $15 billion in sales over the next couple years. At the moment, Pfizer and Allergan’s combined sales are $60 billion.
Recently Sean Williams, writing for The Motley Fool, said, “If you’re looking for higher-growth investment opportunities or anything where you’ll potentially need your money over the next one to three years, I don’t believe Pfizer is the stock for you. … However, if you’re an income-seeking investor and targeting low volatility, then Pfizer might be perfect for you.”
In vaguely related news, there is a whistleblower lawsuit ongoing regarding Pfizer’s subsidiary Wyeth , which is being accused of pushing doctors to prescribe its acid reflux drug Protonix off label. Pfizer bought Wyeth in 2009, and the alleged misdeeds took place before that sale.
In what is almost amusing, the company’s attorney, Brien O’Connor, with Ropes & Gray, was trying to convince Judge Douglas Woodlock to not identify Pfizer as the company involved in the lawsuit, primarily to minimize the possibility that news sources would write stories about Pfizer being involved in the whistleblower lawsuit, although writing about Wyeth without mentioning Pfizer is pretty much an impossibility.
Judge Woodlock apparently agreed, saying, “I will permit Pfizer to be added as a defendant in the case, that it is entirely stayed unless and until there is a judgment in the case, but it seems to me that sufficient information has been brought to my attention here to justify it. There are various ways of dealing with that sort of thing at the end of the trial. First, you may win, in which case, apart from the perception that Pfizer has gotten some public relations problem that apparently was not available to diligent people in the financial press before.”
