Buy, Sell or Hold: Is Pfizer Inc. (NYSE: PFE) the Right Prescription for Your Portfolio?

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In 2008, the journal Health Affairs reported that 25% of China's adult population  – about 375 million people – was "overweight" or "obese."

That number is expected to double by 2028, and obesity is just one health issue in a densely polluted nation that finds itself battling a growing list of ailments.

So it's no surprise that China's pharmaceutical market has been surging at a compounded annual growth rate (CAGR) of more than 16% — the fastest pace in the world, according to research by market-intelligence leader IMS Health Inc. (NYSE: RX). IMS Health estimates that by 2020 the Chinese market for pharmaceuticals will be $110 billion, second only to the United States.

Obesity in children is rapidly spreading with the global expansion of Western food chains, such as McDonald's Corporation (NYSE: MCD) and Yum! Brands Inc. (NYSE: YUM) whose restaurants are enormously popular in China

A plethora of chronic diseases like diabetes, cardiovascular disease, hypertension, stroke, and certain types of cancer are also high on the list of concerns for modernizing nations.

Enter Pfizer Inc. (NYSE: PFE).

Many cholesterol-lowering, statin drugs like Pfizer's Lipitor are helping to prevent heart related diseases globally – not just in the United States.

Some 58% of Pfizer's $48.3 billion in revenue in 2008 came from outside the United States – and 14% of net sales came from Asia. In fact, about 90% of Pfizer's estimated $3.5 billion in overseas 2012 revenue will come from China, according to Goldman Sachs Group Inc. (NYSE: GS) estimates.

Even though Pfizer recently closed some 20 research and development facilities worldwide, it has dramatically increased its operations in China.  For example, the company's major Chinese facility, located in Shanghai, was started with just 14 employees. But as of 2009, the number of employees had grown to 342. 

Pfizer also has established a joint venture with WuHan National Bioindustry Base Construction and Management Office to build a new research and development company.  Pfizer has spent more than $500 million dollars in research and development in China over a period of just three and half years.

In late 2008, Pfizer aggressively entered into China's anti-smoking market by introducing its drug, Champix. With 350 million smokers in China, the company's product could be a great revenue stream for years (if not decades) to come. The smoking cessation market in China is estimated to be valued at about $5 billion.

Pfizer has stated that it wants to increase its share of China's biopharmaceutical market to 6% in 2012 from its present 4%.

Pfizer directly competes with Sanofi-Aventis SA (NYSE ADR: SNY), Bayer AG (OTC: BAYRY), and GlaxoSmithKline PLC (NYSE: GSK).  But with its October 2009 purchase of Wyeth Pharmaceuticals Inc., Pfizer can expect to see tremendous growth in Prevnar vaccines.  Newer product lines such as Lyrica, a neuropathic pain drug, should also see modest growth. 

However, in 2011, Pfizer will no longer have patent protection over its most popular drug, Lipitor.  With 2009 revenue of $11.4 billion, Lipitor is Pfizer's top-seller.

Some analysts believe losing its patent protection will dramatically hurt Pfizer's sales and overall profitability, but brand image and loyalty are very important and will remain strong at least for the foreseeable future.  Customers already using the brand name will most likely continue to use the same product from Pfizer rather than switch to a generic brand.

More importantly, with Pfizer's acquisition of Wyeth, and constant development of its own product lines for humans and animals, Pfizer should be poised to benefit strongly in all major markets and especially in emerging markets like China.

Pfizer is currently trading at 7.4-times estimated 2011 earnings per share (EPS) of $2.26, which represents roughly a 15% discount to its U.S. peers. But it's also worth noting that Pfizer's PEG (Price/Earnings to Growth Rate) ratio is a very rich 6.96. I would much rather see this in the 0.00 – 2.00 category.

Gross profit in 2009 increased by 2.3% to $42.2 billion with a net income of $14.2 billion. Pfizer recently reported results for the fourth quarter and full year of 2009. Revenue for the quarter was $16.5 billion – a 34% increase driven by the Wyeth acquisition.

From a technical perspective, Pfizer had some problems after its recent earnings report failed to thrill Wall Street.  While a majority of the market has experienced a nearly uninterrupted run to the upside since early February 2010, Pfizer has been trending down – and that's a concern.

The Stochastic Oscillator is showing that the stock may be oversold which could provide for near term growth in the price – and the Bollinger Bands are widening, indicating increasing price volatility. Both the Stochastic and Bollinger Bands indicate there is a chance of a reversal to the upside for the stock.

Interestingly enough, Goldman Sachs recently released a list of data aggregated from 487 funds based on their most recent filings.  Second only to technology giant Apple Inc. (Nasdaq: AAPL) on its list of holdings was Pfizer Inc. Some 45 of the funds registered the pharmaceutical giant as one of their top 10 holdings. 

While this does not necessarily mean that the stock is guaranteed to increase in value, it does indicate robust institutional support – which is something that almost always needs to be present to drive a stock the size ($139 billion market cap) of Pfizer to new highs.

Pfizer stock slid 19 cents, or 1.12%, in trading Friday to close at $16.80. That's right in between its 52-week low of $12.75 and its 52-week high of $20.36

Recommendation: "Hold" shares of Pfizer Inc. (NYSE: PFE). If you already own Pfizer shares, you're probably sitting on some nice gains tied to the rally that started in March 2009, so Pfizer's recent price weakness shouldn't bother you too much – not to mention, the 4.27% yield will keep you smiling until profits from China and the Wyeth acquisition work their way to the bottom line.  I think Pfizer's future potential in China is compelling, and the acquisition of Wyeth greatly increase future profit potential, but the very rich PEG ratio of 6.96 and the stock's inability to capitalize on the current market uptrend may indicate that some of its institutional support is waning.

(**) Disclosure: The writer holds no interest in Pfizer Inc.

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Sid is the investment community's best-kept secret. Since 2009, he has served behind the scenes at Money Map Press as Director of Research, analyzing hundreds of securities and profit opportunities for subscribers. He's an expert in the identification of specific market catalysts with "alpha" potential in a wide variety of industries, but especially the small-cap sector. From his years of research and training, Sid has an extreme attention to detail and a passion for identifying unique opportunities the market doesn't yet understand. He brings those recommendations to members of his Small-Cap Rocket Alert.

Sid is also an accomplished drummer and music producer. He lives in Denver.

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  1. noway | April 19, 2010

    Brand loyalty? Are you kidding? Once patent protection and exclusivity are gone, so is the revenue. That's a fact. Besides patients wanting to save money with the generic version of any drug, the insurance companies require it, and some states also force pharmacies to dispense the generic unless the physician writes a 'dispense as written' script. PFE is about to lose over $12B in annual revenue just as sure as the sun rises in the east. No doubt PFE will sell the generic of Lipitor in addition to the branded version, but the huge profits from this drug are about to 'leave the building'. That's why PFE has been buying companies, including Pharmacia and Wyeth. Mergers out of weakness in drug discovery.

  2. R K JOHRI | April 22, 2010

    Do you think this story on the Prospects of PFIZER Holds Good for itsc prospects in India too!
    Here Wyeth has not been merged with pfizer, both Companies exist as separate Entities.

    Looking forward to hearing soon!

    Thanks & Regards,

    Johri R K

  3. Alan | April 23, 2010

    Pfizer is a screaming buy, it is vastly underpriced, its earnings and dividend are increasing, its growth is bounding, its future in China and India will grow fantastically. Its acquisition of Wyeth will vastly enhance their earnings. Any negative news that could be cunjured up will be like a pimple on an elephants rear. The stock price will increase bountifully, doubling.

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