Pfizer Playing the Right Card Amid Changing Sector Landscape

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

The mainstream pharmaceutical industry has been on the cutting edge of drastic change for a better part of the year. From the dreaded "patent cliff" to the ever-persistent FDA, pharmaceutical bellwethers have had to jump through countless hoops this year.

One such bigwig that has been struggling under the weight of the changing sector landscape is Pfizer (NYSE: PFE). Not only did the patent cliff slash revenues generated by Pfizer’s Lipitor, a crown jewel, but the pharmaceutical heavyweight also had to juggle the daunting task of restructuring and refocusing all year through.

While all this may seem overwhelming, it actually represents an industry-wide trend. Merck (NYSE: MRK), a core competitor to Pfizer, also lost out on a lot of revenue after it lost protection on Singulair, its top selling drug. The effects of losing the moat around Singulair were devastating. This was witnessed in the third quarter earnings report that detailed a more than 50% dip in Singulair’s sales. In addition, the FDA, or the common enemy, as I often refer to it, dropped the mallet on Taltorvic, a Sacroma drug that represents Merck’s joint effort with Araid Pharmaceuticals. The FDA rejection was accompanied by requests for further trials.

Interestingly, this snapshot is just the tip of the iceberg. Merck, alongside other pharmaceutical heavyweights, has been having a rough year in light of the changing sector. Nonetheless, I am particularly impressed by the fashion in which Pfizer is handling the situation. I contend that Pfizer is playing the right card.

Cost cutting is only the beginning

For most players in the industry, cost cutting seemingly passes by as the ultimate solution. Merck has clearly demonstrated this. Following a year that has, for the better part, been spent battling thinning margins, the pharmaceutical titan has initiated and implemented various cost cutting programs. While this move is commendable, it does not offer a lasting solution. Tightening up on costs may save the situation but it does nothing to address the underlying problems. Why am I saying that cost cutting appears to be Merck’s ultimate solution? Its other possible play is maintaining the animal health and consumer business. Although these businesses have the capacity to grow, they are low-margin businesses. Given Merck’s current financial outlook, low-margin businesses feature last on its wish list.

Johnson & Johnson (NYSE: JNJ), on the other hand, is being hit hard by the changing sector landscape. Some pundits are arguing that the bigwig will have to shed some of that extra weight through several spin offs; I concur. I believe that Johnson’s involvement in many segments of the industry will stall its response to the changing sector landscape.

Pfizer, however, seems to be taking the best route out of the situation. In an attempt to improve operational efficiency, the company is placing all of its focus around its pharmaceutical business. This explains its decision earlier this year to spin off Zoetis, its animal health division. This spinoff, which will take the form of an IPO, goes a step further to isolate Pfizer’s efforts exclusively toward the core pharmaceutical business. Another solid representation of the seriousness that Pfizer has attached to streamlining its pharmaceutical operations is the record $11.85 billion deal where it sold all of its nutrition business to Nestle.

Although Pfizer’s strategy and ability to increase earnings amid falling revenue is impressive, there is still some degree of uncertainty shrouding the stock. Its success as of the moment mainly relies on its pharmaceutical business. Should the divestitures fail to pay off, the company will not only lose out to the competition but it will also be very many steps back and may spend a lifetime returning to where it is was.

As of the moment, investors should hold in wait for next year; the year when all the focus on pharmaceuticals will probably start to pay off. The pharmaceutical titan has an excess of 80 drugs in clinical and regulatory stages and its pipeline will hopefully receive a boost next year. In the meantime however, the best move would be to hold. After all, the dividend has been boosted to 24 cents.

muhammadbazil 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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