My favorite drug stock right now is Merck (NYSE:MRK). I'm excited about the cost savings that I think can be achieved by its planned merger with Schering-Plough (NYSE:SGP). Moreover, according to a March 9 Schering press release, "Post-transaction, the combined company will have a strong balance sheet with a cash and investments balance of approximately $8 billion." This gives the company options to perhaps - and I'm speculating - buy back shares, up its dividend or make acquisitions.

IN PICTURES: Biggest Stock Scams

With that in mind, my second-favorite drug stock for the long haul is Pfizer (NYSE:PFE). Trouble is, I'm not super excited about the stock's potential in the near term. Here's why I think it could struggle over the next few months, and what makes it attractive to me for the long run:

Short Term Issues?
April 28, the New York-based company disseminated its first-quarter earnings report. It earned 54 cents per share, which was well ahead of the 49 cents Wall Street had expected. However, in that same release, in the "financial guidance" section, it indicated it was looking for adjusted diluted earnings per share (in 2009) of "$1.85 to $1.95." That's a bit of a disappointment in that the estimate from Thomson Financial Networks is $1.95 per share. In short, we could see estimates tick down as a result, which I think would be a negative. (Learn how this key metric is calculated and how it is used to judge market performance in Earnings Forecasts: A Primer.)

Another concern I have is Pfizer's planned acquisition of Wyeth (NYSE:WYE), which is expected to close in either the third or fourth quarter. Wyeth is an extremely large company that booked $22.8 billion in revenue in 2008. I worry that because it is so large, Pfizer, which generated 2008 revenue of $48.3 billion, could have trouble bringing it under its wing, and that it could take a couple of quarters for it to fully appreciate what it's buying.

An article in BusinessWeek earlier this year offered an interesting take on Pfizer's (prior) acquisition of Pharmacia. According to the article, "The Pharmacia acquisition turned out to be a disappointment because its biggest drug, the Cox-2 inhibitor Celebrex, was severely damaged by the fallout over Merck's similar drug, Vioxx, which was pulled from the market due to safety concerns." Again, the point is that sometimes you don't know what you will get. (Learn more in Measuring The Medicine Makers.)

Long-Term Likes
In spite of the pessimistic attitude I displayed above, I think a merger with Wyeth has the potential to bear tangible fruit down the line. After all, because of its sheer size, logic seems to dictate plenty of cost savings to be realized. Furthermore, I do think it can add big-time to earnings down the line. Per the Pfizer press release, "The deal is expected to be accretive to Pfizer's adjusted diluted earnings per share in the second full year after closing."

Another thing that caught my attention in that same January 26 release was this comment: "It is expected that no drug will account for more than 10 percent of the combined company's revenue in 2012." In short, I think that such diversification could be a big plus for both the company and shareholders. Compare this to Novartis (NYSE:NVS), where Diovan, its high blood pressure product, represented 14.4% of sales in its first quarter.

Bottom Line
I am concerned that Pfizer could have its hands full with the Wyeth acquisition in the near term. I also think that some may be disappointed with its earnings outlook for 2009. However, I like this company for the long run and believe that combining forces with Wyeth will pay off down the line. I particularly like the product diversity the combined company is expected to have and the potential for cost savings.

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  3. Home & Auto

    Understanding Rent-to-Own Contracts

    They can work for you or against you. Here's how to negotiate a fair one.
  4. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  5. Home & Auto

    Avoiding the 5 Most Common Rent-to-Own Mistakes

    Pitfalls that a prospective tenant-buyer could encounter on the road to purchase – and how not to stumble into them.
  6. Home & Auto

    Renting vs. Owning: Which is Better for You?

    Despite the conventional wisdom, renting might make more financial sense than you think.
  7. Investing Basics

    Explaining Options Contracts

    Options contracts grant the owner the right to buy or sell shares of a security in the future at a given price.
  8. Home & Auto

    When Are Rent-to-Own Homes a Good Idea?

    Lease now and pay later can work – for a select few.
  9. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
RELATED TERMS
  1. Implied Volatility - IV

    The estimated volatility of a security's price.
  2. Plain Vanilla

    The most basic or standard version of a financial instrument, ...
  3. Normal Profit

    An economic condition occurring when the difference between a ...
  4. Theta

    A measure of the rate of decline in the value of an option due ...
  5. Equity

    The value of an asset less the value of all liabilities on that ...
  6. Derivative

    A security with a price that is dependent upon or derived from ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!