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October 23, 2005
The Tar Pit Beckons
Posted by Derek
Over at Pfizer, reality is finally flapping down on its big, black wings. It's been circling for a while. Looking at the stock chart, you can make a case that somewhere around 2000 was when they stopped beating the S&P index, and the middle of last year is when they stopped staying even with it. I've had a lot of things to say about Pfizer on this blog (and its predecessor) over the last few years, and most of them have been unkind. (Here are a couple of posts that will give you the idea).
The short version: (1) Pfizer's ever-increasing size means that most everything scales up except what they need the most: research productivity. (2) Billion-dollar drugs must roll off their conveyer belt, one after the other, and that's something that no one has ever figured out how to do. (3) Lipitor, mighty monster that it is, is the main thing keeping the music playing. But it will go away, and there is nothing to replace it. Perhaps nothing ever could. (4) While a massive sales force is quite a thing to have, they do need things to sell, don't they?
I've thought more than once, as I write things like this, that I must have killed off any chances I had to work over there. But I don't see Pfizer doing a lot of hiring for the next few years - do you? It's a sad situation, but perhaps it'll serve as an example for the rest of industry. Somehow, I don't think that all these acquisitions were made with the goal of being a poster boy. . .
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College chemistry, 1983
The 2002 Model
After 10 years of blogging. . .
1. Bill Tozier on October 23, 2005 9:46 PM writes...
Well, one positive thing: if things keep on this way, there'll be four or five really well-equipped and brand-spanking new research buildings for rent here in Ann Arbor....
Permalink to Comment2. Michael Vickers on October 24, 2005 12:35 AM writes...
...AND La Jolla.
Permalink to Comment3. Kay on October 24, 2005 7:41 AM writes...
Derek: bravo on your title choice!
Permalink to Comment4. dorf on October 24, 2005 8:14 AM writes...
They may resemble this remark..........
The great lumbering beasts looked up, blinking, from their
comfortable new beds in the warm tar.
A dim sense of warning flickered through the simple brains of
a few, and one or two struggled to rise, but without success.
The sun ambled slowly across the sky.
Permalink to CommentThe giant creatures remained on the tar lake,
though there seemed to be fewer, now.......
5. LNT on October 24, 2005 8:49 AM writes...
Here's something I've never understood about the pharmaceutical business: why must companies maintain a high growth rate? What's wrong with Pfizer maintaining it's current cash flow without any growth? It's still a huge, stable company with significant revenue. People act as if Pfizer is loosing money. It's not. It's making money hand-over-fist, but it's just not growing. Isn't that exactly what utility stocks are all about? You own the stock, you look forward to a nice 5-10% dividend per year, but the stock doesn't rise or lower in value significantly year-to-year. Why can't the same be true of pharmaceutical stocks?
Permalink to Comment6. Jake McGuire on October 24, 2005 10:19 AM writes...
Because when the people who currently own the stock bought it, they were expecting lots of continued growth - in part because Pfizer executives told them it was coming. If that turns out not to be the case; say if Pfizer shareholders want a 7% dividend yield; the stock price is going to have to go down 50%. This is going to make a lot of shareholders unhappy, probably lawsuit-level unhappy. It'll also make it harder for them to buy the biotech companies that are currently feeding their pipeline.
Permalink to Comment7. JSinger on October 24, 2005 10:54 AM writes...
Also, even if you wanted to pitch Pfizer as a dividend stock, pharmas need to keep running just to stay in place while their patents expire. They can't run on autopilot the way a utility can.
Permalink to Comment8. Dr Toot on October 24, 2005 4:24 PM writes...
Well, there's a couple of ways of looking at it. Things come & go in cycles, for one. Nextly, if you're that heavily capitalized, you can buy your research elsewhere.
Permalink to Comment9. LNT on October 24, 2005 4:24 PM writes...
Maybe I'm dense, but I still don't understand. Pfizer's stock is trading at $20-$22/share. The 2005 expected dividend is $1.90. This gives a P/E ratio of ~11. This is an excellent P/E ratio! Why would investors not want Pfizer stock? Even if the earnings came down a bit, to say, $1.50 -- the P/E is still around 15 -- very respectable in my book. Yes, they are going to have to work very hard to simply maintain "status quo". But even if they only maintain "status quo", it still seems like a good investment to me. I'll gladly take a 7-10% return on my investment!
Permalink to Comment10. Ramesh Krishnan on October 24, 2005 6:40 PM writes...
To LNT
P/E is calculated on more than just dividend; it would include retained post-tax earnings that were not distributed. That makes Pfizer's current PER around 16 on a trailing basis. Their forward PER is only about 10 though; I would interpret that as a reluctance of the market to believe that Pfizer can keep up the future earnings as they have indicated.
At the end of the day, the writing on the wall is very clear. Pfizer will not be able to drive the juggernaut much more, and I for one, expect to see the company shed sizable portions of their sales, marketing and admin workforce.
Permalink to Comment11. Kay on October 27, 2005 7:34 AM writes...
Ramesh: Although I admit up-front that you may be correct, I wonder why Pfizzer would slash much from marketing because the are so good at the dirty side of the business (perhaps some of the best in the business). Conversely, the clean (?)side of the business - R&D - are bums. I expect they will get the bum's rush in large numbers going forward.
Permalink to Comment12. swished on December 15, 2005 10:18 AM writes...
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