Pfizer Drug Development Ahead Of Schedule

By Jeffrey Lange | October 06, 2008 AAA

In the last six months the number of late-stage (phase 3) drugs in Pfizer's (NYSE:PFE) drug development pipeline has gone from 16 to 25, and Pfizer now has 114 programs ranging from Phase 1 through FDA Registration. Combine this with a hefty dividend yield of 6.7% based on its October 3 closing stock price of $19.00, and you have the potential for a great portfolio addition.

This stock will pay a generous cash dividend while the investor awaits new drugs to be approved by the FDA and restoration of Pfizer's historic growth. (To learn how FDA decisions can create and destroy value, read The Ups And Downs Of Biotechnology.)

Fast Acting Drug Development
Pfizer is one of the largest drug companies in the world, despite recent share repurchases and declining stock price due to revenue dissipation resulting from patent expirations. In terms of market capitalization, Pfizer ranks second with $126 billion, behind only Johnson & Johnson (NYSE:JNJ) $189 billion, and ahead of Novartis (NYSE:NVS) $118 billion, GlaxoSmithKline (NYSE:GSK) $110 billion and Abbott Laboratories (NYSE:ABT) $90 billion. Despite its challenges in the past few years, the company remains the second largest drug company in market value.

Of the 114 total programs in development, management reports that 31 programs advanced to the next stage of development; 13 were discontinued; and one was withdrawn from registration. The majority (19) of the advances were in Pfizer's strategically defined "high-potential disease areas", such as oncology, pain management, inflammation, diabetes, Alzheimer's disease and schizophrenia. Historically, many of Pfizer's blockbuster drugs, those drugs generating over $1 billion in annual revenue, were in the area of heart management, with Lipitor being the most prominent example. Pfizer has indicated a change in R & D focus, and the latest announcement seems to confirm progress in these strategic markets. "We are making significant operational improvements and driving our strategies to accelerate development," said Martin Mackay, president of Pfizer Global Research & Development, in a press release. "We are investing in the most promising disease areas, where there is strong unmet medical need, favorable markets and an opportunity to advance medical science."

Pipeline Larger than Expected
Importantly, Pfizer's pipeline is now beyond projections given to investors in March 2008, when the company indicated its goal was to grow its Phase 3 pipeline to at least 24 and as many as 28 new indications by December 2009. Pfizer already has 25 programs in final Phase 3 testing, exceeding the previous goal by one additional drug and more than one year ahead of schedule.

Management said the company is targeting 15-20 regulatory submissions in the period 2010-2012 for approval to enter market in final form. Finally, management said that one potential drug recently began Phase 3 testing against non-small-cell lung cancer, which Pfizer reports as the leading cause of cancer death in the U.S. This drug, if successful in Phase 3 testing, could have a significant impact on revenue and could offset the adverse effects of some of the company's leading brands going off-patent. Moreover, the company has seven other cancer programs in Phase 3 testing. (Find out how patent output can affect a company's success, in Buying Into R&D.)

Patent Problems
As described above, Pfizer is making notable strides in developing drugs with significant market and revenue potential to offset some or all of the decline from a number of drugs (e.g., Zoloft, Norvasc, Zyrtec) that have already been opened up to generic competition, and to offset the negative impact of Lipitor's expiring patent protection in 2011. Management believes that new drugs on the market in years 2010-2012 will compensate for loss of the cholesterol-lowering drug Lipitor. Lipitor accounts for approximately $12 billion in annual sales and the patent expiration for this drug presents a significant challenge.

Whether management achieves the goal of replacing Lipitor's revenue is a matter of speculation, not fact. However, Pfizer has substantial cash resources, totaling approximately $25 billion, to make strategic acquisitions of biotechnology or drug companies with promising pipelines to fill the potential void. The company also has a considerable amount of unused debt capacity to facilitate a large acquisition. According to the latest quarterly data as of June 30, 2008, Pfizer's long-term debt totaled only $7.2 billion, representing a very modest 10.8% of equity capital of $66.6 billion. (For more about debt ratios, read Debt Reckoning.)

Dividend Makes the Wait Less Painful
Pfizer pays a dividend of $1.28 annually, producing a cash yield of 6.7% based on the latest closing price, as stated above. This ranks thirteenth highest among the Standard S&P 500 companies based on declared cash dividends through October 1, 2008.

This cash dividend is considered secure currently and over the next year, as the company has sufficient cash flow from operations to service the annual dividend payments of an estimated $9 billion and capital expenditures estimated at $5 billion. Cash flow from operations is estimated at approximately $17 billion for 2008 (cash flow $11.5 billion in first half of 2008) after R&D expenditures. There appears to be a sufficient cushion for possible shortfalls in cash flow from operations, particularly in view of the company's unused debt issuance capacity. Furthermore, management appears to be committed to maintaining the dividend, evidenced by the implementation of a major cost reduction programs to bring expenses in line with reduced revenues resulting from patent expirations.

The continuation of the cash dividend versus the cash flow produced from operations is a key monitoring metric that should be followed for any long-term position in the stock. At this time, the dividend appears secure.

Pfizer the Cure for Volatile Market Sickness
The environment has been tenuous in the equity markets, and credit conditions have been both volatile and opaque in terms of the traditional safe havens from equities, other than the U.S. Treasury market. Accordingly, investors may want to consider high quality equities such as Pfizer, which generates an above average dividend yield and has prospects for growth over the long-term.

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