Bulls And Bears Debate Pfizer

Pfizer Inc. (PFE) is a good example of why size matters in pharmaceuticals. Beaten down for much of the year over litigation and leadership concerns, worries about shrinking margins, looming competition from generic drugs and a thin pipeline of new drugs, Pfizer shares staged a comeback in July after a welcome management shift. They rose steadily from a 2006 low of $22.16 to a 52-week high just shy of $28 on Sept. 1 and are outpacing the rest of the sector. Though succession issues at the maker of Lipitor, Zoloft, Zithromax and Viagra were settled amicably, other problems still lurk, raising doubts about whether autumn will be as kind to Pfizer's shares as the summer has been.

The Bull Case

Medicinal Muscle: After acquiring Pharmacia in 2003, New York-based Pfizer became the world's biggest player in terms of revenue in the $600 billion global pharmaceuticals business. Its product spread was unrivaled. That's still largely the case, even after Pfizer agreed to sell its consumer health-care operations to Johnson & Johnson (JNJ) for $16.6 billion. Standard & Poor's analyst Herman Saftlas notes that Pfizer's "drug portfolio is unmatched in terms of breadth and depth." Among Pfizer's lines of medicines to treat cancer, epilepsy, depression and high blood pressure, 15 "are the leaders in their respective therapeutic markets, five are among the world's top-selling products and eight generate sales exceeding $1 billion a year," Mr. Saftlas wrote. Top among those products is cholesterol drug Lipitor, the most-prescribed drug on the overall market. Lipitor generated about $12 billion of Pfizer's $53 billion total revenue last year, and the company expects sales of about $13 billion in 2006.

Analysts are buzzing with optimism over new Chief Executive Jeffrey Kindler, who was tapped in late July to replace embattled former CEO Hank McKinnell. J.P. Morgan's Chris Shibutani says he likes the way Kindler, Pfizer's former general counsel, was "talking the talk," and Friedman, Billings, Ramsey analyst David Moskowitz writes that he has high hopes Kindler's recent reshuffling of management will make Pfizer more agile and flexible. Though some analysts bemoan Pfizer's sale of its consumer-products unit - last year it generated $3.88 billion in sales of well-known products such as Benadryl, Visine and Listerine - others are pleased by Kindler's plans for the proceeds, which include pumping up research and development. They are also high on his plan to repurchase $17 billion of Pfizer stock by the end of 2007; the buybacks alone could be enough to shore up Pfizer's share price, analysts say.

Invigorating Value: Many analysts see Pfizer as the most attractive value play in the pharmaceutical sector. At 12.4 times J.P. Morgan's 2007 earnings-per-share estimate of $2.12, Shibutani says Pfizer shares are trading at a 13% discount to peers. S&P's Saftlas says Pfizer shares are slightly undervalued at current levels and should be trading at about $28.40. His 12-month price target for the stock is $31. And value investor Mark Boyar wrote in Boyar's Alternative Viewpoint in early August, "Pfizer represents one of the best tests in recent memory for value investors." Though "the negatives surrounding Pfizer are numerous and ugly," Boyar reminds investors Pfizer has one of the best product spreads on the market. Despite the lack of a clear hit on the way, the company has "over 300 projects in discovery research in 18 therapeutic areas." His three-to-five-year share-price target is $40.

The Bear Case

Pipeline Pundits: Though Pfizer has the cash and balanced international sales (it generates about 48% of its sales outside the U.S.) to outspend and outsell its rivals, the lack of a clear blockbuster in its pipeline worries some analysts. Merrill Lynch notes that "the consensus view is that Pfizer has the worst pipeline relative to its size in the global industry." Its pipeline includes a new cholesterol drug torcetrapib, which is coming out at a time of fierce cholesterol-drug competition. And Exubera, a form of inhalable insulin Pfizer plans to start selling this month, faces patent challenges from Denmark's Novo Nordisk AS (NVO). And even though Massachusetts-based Leerink, Swann & Co. calls Pfizer "the least-expensive stock in our large-cap pharma universe," it advises "staying on the sidelines until we can gain greater confidence that (Pfizer) can find new pipeline drugs at a reasonable cost."

Managed Threats: Pfizer has benefited from Medicare drug coverage, but its ability to raise prices - and profits - is threatened by congressional efforts to rein in the drug program's costs. Managed-care providers are also trying to keep drug costs down and are using cheaper alternatives for leverage. For example, the U.S. Department of Veteran Affairs switched from Pfizer's Viagra to a cheaper rival earlier this year. S&P noted that lower reimbursements to drug companies from managed-care providers in 2004-2005 have resulted in a slowdown in overall industry revenue growth to 7% from double digits previously.

Patent Problems: Analysts are concerned about threats from generics and swirling patent lawsuits that will test new CEO Kindler's legal chops. Exubera faces a patent-infringement challenge from Novo Nordisk. And while a federal appeals court affirmed Pfizer's Lipitor patent protection in August, it nixed a second patent in a decision that could cut Lipitor's protection against generic rivals by more than a year and take a multi-billion-dollar bite from sales in 2010 and 2011. But patent expirations may start hitting Lipitor indirectly much sooner. Merck's rival cholesterol drug Zocor lost patent protection in June, and industry watchers fear that Lipitor will start losing ground to the generic version of Zocor right away. Sanford Bernstein's Richard Evans estimated in July that about two-thirds of new cholesterol-drug users will start on generic drugs due the introduction of the Zocor alternative and that 4% of existing users will switch. "We believe this is adequate to tip Lipitor into decline," he wrote. Already, benefit-management firm Express Scripts took Lipitor off its recommended list at the start of 2006 - an indication it could aim for cost savings by recommending Zocor's generic alternative.

Disclosures

Standard & Poor's and/or one of its affiliates has performed services for and received compensation from this company during the past 12 months.

Pfizer has been a non-investment banking client (for securities-related services) of Bear Stearns & Co. in the past 12 months. Within the next three months, Bear Stearns or one of its affiliates intends to seek compensation from Pfizer for investment banking services. Bear Stearns acted as a financial adviser to Pfizer in the announced sale of its consumer health division to Johnson & Johnson.

Raymond James made no specific disclosures related to Pfizer.

Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment-banking services from Pfizer.

Pfizer has been a client of UBS Securities LLC in the past 12 months and investment-banking services are being, or have been, provided.

Pfizer is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided.

The author(s) of the Cowan & Co. report and/or members of their households own a long position in the common shares issued by Pfizer.

In the past 12 months, Leerink, Swann & Co. has received compensation for providing non-securities services to Pfizer.

Friedman, Billings, Ramsey & Co. made no specific disclosures related to Pfizer.

Citigroup Analyst George Grofik holds a long position in the shares of Pfizer. A director of Pfizer serves as a director on Citigroup's International Advisory Board. Citigroup Global Markets Inc. or its affiliates beneficially owns 1% or more of any class of common equity securities of Pfizer. This position reflects information available as of the prior business day. Within the past 12 months, Citigroup Global Markets Inc. or its affiliates has acted as manager or co-manager of a public offering of securities of Pfizer. Citigroup Global Markets Inc. or its affiliates has received compensation for investment banking services provided within the past 12 months from Pfizer.

JP Morgan or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for Pfizer Inc. within the past 12 months. The following analysts (and/or their associates or household members) own a long position in the shares of Pfizer Inc. Pfizer is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. JP Morgan or its affiliates received in the past 12 months compensation for investment banking services from Pfizer Inc. JP Morgan or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Pfizer Inc.