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.
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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.)
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.
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.