Pfizer Might Finally Move to Help Cushion Lipitor Blow

The relatively new CEO at drug giant Pfizer (PFE) has been focusing on cost cutting, not major acquisitions, since he arrived but investors have wanted more. The company’s blockbuster cholesterol treatment, Lipitor, represents 25% of Pfizer’s $48 billion in annual sales, but the drug faces patent expiration in 2011. Fears over how the company would replace such a loss has been hampering its share price for a long time. Despite a dividend yield north of 7%, investors have been uninspired, as the stock only fetches 7 times 2008 expected earnings.

We now hear that Pfizer is in talks to acquire Wyeth (WYE) for about $60 billion. While most large deals are met with initial skepticism (Pfizer shares are down in pre-market trading to $16 and change) a large deal is very important for an industry facing large scale patent losses and limited R&D pipelines. If this deal does come to fruition, it shows that Pfizer management actually did have a plan, they just weren’t going to be rushed into it by Wall Street. With a P/E of 7 and a dividend yield of 7.5%, Pfizer shares are very cheap and at the very least have limited downside. If the Wyeth deal happens and works well, the announcement of the deal could easily mark the bottom in the stock.

Full Disclosure: Peridot Capital had a long position in Pfizer at the time of writing, but positions may change at any time

Enjoy this post? Subscribe and never miss another one: RSS | Email | Twitter

6 Thoughts on “Pfizer Might Finally Move to Help Cushion Lipitor Blow

  1. Looks like the P/E is higher than that, no?

  2. Chad,
    I established covered calls with PFE this morning at $16.80 and sold the Feb09 $17 calls against it for $.48 (covered calls). Plan to also capture the $.32 quarterly ex-div on 2/4/09. I believe PFE dipped below $17 this morning (compared with its closing price yesterday of $17.21) because a merger with Wyeth would most likely require PFE to pay for WYE with both cash and stock — the stock issue would be slightly dilutive to the price.
    I don’t view this acquisition as positive for PFE and my gut feeling now is that they probably will ultimately decide not to do it. Why does one slow-growth behemoth, Pfizer, need to buy another slow-growth half-behomoth? PFE would be much better served by purchasing a good biotech (like Amgen) or perhaps a health services company (how about MHS or ESRX?).

  3. Chad Brand on January 23, 2009 at 1:17 PM said:

    Assuming their Q4 is in-line with estiamtes of 59 cents next week, they’ll earn $2.38 per share for 2008. $16.90/2.38 = 7.1

    You might be just looking at Yahoo Finance or something and see a different number. Here is a post on why those numbers are often wrong:

  4. Chad Brand on January 23, 2009 at 5:05 PM said:


    We think alike on the covered call idea. In some of my income-oriented accounts I bought PFE and sold Jan 2010 $17.50 calls against them.

    I would not be surprised to see the deal announced soon, perhaps even Monday morning. The fact that they have been discussing it for months and it only leaked out today indicates to me that it is close to being a done deal, but obviously things fall apart at the last minute all the time.

    I think PFE had to do a deal before Lipitor went generic and WYE seems to be a good fit with their existing product lines. Amgen is biotech so less synergies there. As for a PBM like MHS or ESRX, there are fewer synergies there. MHS used to be Merck-Medco but they got into trouble because they were perceived to push Merck’s drugs more than competing products.

    Anyway, given PFE’s dividend and valuation, I like the covered call idea on it very much. Best of luck.

  5. Hondo on March 4, 2009 at 11:00 PM said:

    Glad no one goes back to review a financial advisor’s blog posts. 24 hours after this posting, PFE slashed its dividend and fell -10% on concerns that it is overpaying for WYE. When an ostensibly low P/E stock like PFE buys a WYE at an expensive P/E, you wonder about the two points of Chad’s investment thesis.

    No positions in PFE; long WYE

  6. Chad Brand on March 5, 2009 at 9:00 AM said:

    The dividend cut was unexpected, which is why the stock fell even further even after the deal terms were widely known. Add in pressure from the arbs and PFE stock has declined significantly. Nothing fundamentally has changed, so PFE has simply gotten even cheaper. The deal isn’t going to close for another 6 months, though, so we aren’t going to see any synergies for a while.

    Keep in mind that this blog is focused on long term contrarian value investing, so short term profits is not the goal here. Besides, by selling covered calls and getting a high dividend, investors can shield themselves from short term downside if they so desire.

Post Navigation