Tickers in this Article: PFE, TEVA, LLY, GSK
Drug giant Pfizer (NYSE:PFE) reported a three-fold increase in its profits from a year ago. Pfizer delivered EPS of 47 cents, beating estimates by a penny. Revenues of $17.6 billion also beat estimates of $17 billion. Yet Pfizer's outlook for the future was very cautious and the company suggested that 2012 revenues may come in lower than anticipated due to continued stiff competition from generic drugs.

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A Good Prescription
Normally, when a company issues weaker than expected guidance, shares aren't treated too well in the market by investors. In Pfizer's case, it offered a good prescription of how to handle to future. First, the company announced it was going to significantly reduce research and development expenditures over the next couple of years. After spending $9.4 billion on research and development in 2010, and originally forecasting $8 to $8.5 billion in R&D for 2012, Pfizer cut its 2012 R&D spending to $6.5 to $7 billion. Second, the company announced its intent to buy back $5 billion in stock. With a market cap in excess of $150 billion, this is not significant buyback but it's an excellent shareholder-oriented move. With a nice dividend yield of 4.4% and this buyback, Pfizer is clearly sending a signal that it thinks its equity is a good use of capital. (For related reading, check out Abbott's Next Act.)

A New Direction
Pfizer shares are starting 2011 in solid shape. Shares are trading at a 52-week high on hopes that the company is embarking on a new direction. The company will focus more efforts on oncology considering the potential growth opportunity there. While Pfizer will still have a strong presence in generics, it sees the writing on the wall. Names like giant Teva Pharmaceuticals (Nasdaq:TEVA) have a strong foothold in the space. With ample free cash flow, Pfizer is using it to retire equity that costs 4.4% via the dividend yield. Other major drug stocks are rallying on the news. Names like GlaxoSmithKline (NYSE:GSK) and Eli Lilly (NYSE:LLY) both yield over 5.5% and could take a cue from Pfizer and do the same thing.

The Bottom Line
Pfizer's decision to cut back on R&D and instead use the funds to repurchase its attractively priced stock is getting good praise from the market. This could have Pfizer thinking of buying even more stock in order to lift shares further. (For more, see Drug Companies With Tasty Medicine.)

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