Pfizer Paging Dr. House

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Anyone who was a fan the Fox medical drama, House, M.D. knows that often diagnostics is one of the most critical parts of patient care. According to a recently-released report from the World Health Organization, less than 20% of cases that involve a drug-resistant strain of tuberculosis are ever properly diagnosed. The promising news for patients is that a study published in the New England Journal of Medicine indicates that Pfizer’s (NYSE: PFE) drug, Zyvox, when added to current treatment, may effectively be used for this condition. While I may not possess Dr. House’s laconic humor, if asked if this is yet another compelling reason to own the stock – “Well, duh.”

The TB Market

There are two central elements to this development: first, drug resistant TB (XDR-TB) is not very common, but neither is it limited to remote African countries; and second, the use of Zyvox has shown promising results, not a conclusive solution. The real takeaway from this news is that the company continues to press forward with new and existing protocols in such ways that give it great promise as a part of your core portfolio.

The XDR-TB study was conducted in a joint effort between the U.S. and South Korea.  The WHO data reveals that by 2011, cases had been reported in 77 countries around the globe. For context, the number of U.S. cases between 1993 and 2010 is believed to be 57. Still, with less than 20% of global cases diagnosed, the numbers could be much larger. That said, a cure for XDR-TB is not enough to drive the performance of Pfizer’s stock.

Additionally, study results showed that 82% of participants had negative reactions to the treatment protocol. Side effects included “included a decrease in the ability of the bone marrow to produce blood cells, resulting in low red and white blood cell counts, and damage to the optic and peripheral nerves.” A reduction in dosage significantly lowered toxic levels, but there is still work left to be done. Competitors including Merck (NYSE: MRK), Johnson & Johnson (NYSE: JNJ) and Abbott (NYSE: ABT) are each working on similar drugs.

Why Does it Matter?

Aside from the patients and their families, one is left to wonder if this news is significant from an investment perspective; it has been very thinly reported and is not likely to serve as even a near-term catalyst for the stock. There are not a sufficient number of patients afflicted by XDR-TB to drive big sales for the drug companies and the treatment of even basic TB has fallen largely into the realm of charity. When the medical community and the real-life Dr. House determine how to diagnose and treat XDR-TB, most of our lives will be utterly unaltered.

The reason that this news should be seen as being of value is because of what it represents. It represents evidence that in a year when Pfizer has seen a blockbuster drug like Lipitor lose patent protection – and much of the revenues from the 3.5 million prescriptions per month that are filled – the company continues to research, explore, and innovate. A drug company’s pipeline is its lifeblood, but sometimes blockbuster drugs come from unexpected places. The fact that the company is only peripherally involved in the research described above does not eclipse the fact that Pfizer continues to push forward. In simpler terms, the story should serve as a reason to take a look at the stock.

When you consider the company and its metrics, it looks attractive at current levels. Trading at a forward P/E of just 11.1 relative to 12.6 for Merck, 13.1 for J&J and 12.4 for Abbott, the stock appears to be attractively priced. Additionally, where Pfizer boasts an operating margin of 30%, Merck is at 23%, J&J at 26% and Abbott at 22%. All four companies offer attractive dividends ranging from 3.1% to 3.6%, with Pfizer at 3.4%. The combination of pipeline, metrics and innovative direction makes Pfizer an attractive buy at current levels.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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