Pfizer's 10-year stock chart is the picture of illness, a relentless torrent of selling and disgust. Not even good news, like , helps.
Is there a cure? Yes: Extra-strength patience.
Everyone knows the bad news: Pfizer's biggest drug, Lipitor, loses its patent protection next year. Other drugs, including Viagra, another big seller, will be off patent soon. At one point, before Pfizer bought Wyeth last October, 70 per cent of its revenue came from drugs protected by patents that would expire by 2015.
The Wyeth deal didn't do much to solve the immediate pipeline problem; Wyeth has some big-selling drugs but they too are nearing the end of their sheltered lives.
But the acquisition did add something of value, including stability. Pfizer got out of consumer products a few years ago, selling its business to Johnson & Johnson. Now it's back in that industry and in veterinary health - both stable cash producers.
So it makes sense for investors to start with the dividend. Pfizer shares yield 4.5 per cent. The dividend costs the company about $6-billion (U.S.) a year. Cash flow this year will be about $19-billion. Even after subtracting the substantial cash that stops flowing after the patent expirations, the dividend looks safe. The new Pfizer - that is including Wyeth - has 17 drugs that do a billion of business a year and none accounts for more than about 10 per cent. It's more diversified in other words.
So that means Pfizer is one of those "paid-to-wait" stories. How long will you wait? The near-term pipeline is dry but longer term there are some interesting molecules that might grow up to be blockbusters or even just healthy revenue producers. Wyeth, in particular, has some mid-stage Alzheimer research that could yield blockbusters.
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It's also strong in biotechnology, or biologics, which involves bigger and more complex molecules derived from living cells as opposed to the smaller, chemical ones Big Pharma traditionally dwells in. Again, though, the benefits from this know-how are years down the road.
But on the bright side, Pfizer has $17-billion in cash and short-term investments on the balance sheet. The company has historically been fond of buying its stock when it's cheap. Three years ago it spent $10-billion investing in its own shares. The return on investment is much better today. Expect more buybacks. You can also expect modest dividend increases.
But what about that stock price, which falls relentlessly, even when Pfizer announces it's laying off 6,000 workers and shuttering eight plants?
Two things make the selling stop. First, the dividend yield, which is substantially higher than 10-year bonds. Apparently the extra juice isn't enough yet, but at some point it becomes irresistible.
Second, the stock will stop falling when analysts start raising estimates and the company consistently beats expectations. That, I think, will also take some time because there are a lot of moving parts to the earnings.
It's easy to call Pfizer a cheap stock. It's also easy to see it getting cheaper. The dividend yield looks good but if it climbs just one percentage point - easily conceivable - the stock gets clobbered by a fifth.
Pfizer is a venerable, 160-year-old company. It has a powerful brand name and it's rich in assets. It's also a global leader and a member of the Dow Jones industrials.
It was addicted to blockbusters to deliver earnings and those days are over. But eventually, inevitably, the pipeline will fill up and investors will let it out of the doghouse.
Given the trend, the stock should be on your radar. If it's not cheap now, it will be soon.