A Must Buy Dog of the Dow

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

Pfizer has one of the richest drug pipe lines in the health care sector. The company is on the verge of finalizing its drug PD-0332991 for breast cancer and hopes to gain FDA nod for Eliquis by 2013 March. Last month, PFE expanded its already rich drug portfolio with acquisition of Quillivant and FDA approval of Xeljanz. These new drugs have a combined sales potential of more than $10 billion dollars. I believe PFE is a strong buy and is trading at very cheap multiples.

Company Profile

Pfizer (NYSE: PFE) is one of the largest pharmaceutical companies in the world, with a market capitalization of $187 billion. The company engages in the discovery, development, and commercialization of biopharmaceutical products aimed at treatment both humans and animals. The company has a long list of start products to its name, but Viagra and Lipitor stand out.  

Growth Prospects

Pfizer has approximately $23 billion in cash and equivalents and this gives it a lot of leverage to engage in M&A and R&D activities. The company has more than 85 drugs in its pipeline, with most in middle to early stages of development. This number takes it beyond other industry rivals such as Johnson and Johnson (JNJ) and Eli Lilly (LLY). The company attained FDA approval for its drug Xeljanz which is administrated to patients suffering from rheumatoid arthritis. Xeljanz will only be administered to patients with low tolerance or therapy response levels, to methotrexate. The annual treatment with Xeljanz can cost around $24,000 annually and Xeljanz can have a peak sales potential of approximately $3 billion.

The company has a joint venture with Bristol-Myers Squib (NYSE: BMY) on the blood thinner, Eliquis. The drug was supposed to get FDA approval almost 6 months ago, but the application was rejected on the grounds of insufficient trial data. The company expects Eliquis to get FDA review by the end of March. According to analysts, the drug can reach peak sales of around $2.5 billion. Last month PFE acquired Nextwave Pharma for $700 million, for their ADHD portfolio. This acquisition will give PFE Quillivant right for North America. Quillivant is the only drug approved by FDA for ADHD which can be administered as a liquid. This makes it much more useful for patients in the smaller age groups, who find it hard to swallow pills.

Financial Health

The company is in excellent financial health, as can be seen from the table below. The Quick Ratio and Current Ratio are below industry average. The leverage ratios are above industry average and show us the Balance Sheet strength of Pfizer

<table> <tbody> <tr> <td colspan="4"> <p><strong>FINANCIAL STRENGTH</strong></p> </td> </tr> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Industry</strong></p> </td> <td> <p><strong>Sector</strong></p> </td> </tr> <tr> <td> <p>Quick Ratio (MRQ)</p> </td> <td> <p>1.7</p> </td> <td> <p>2.12</p> </td> <td> <p>2.07</p> </td> </tr> <tr> <td> <p>Current Ratio (MRQ)</p> </td> <td> <p>1.96</p> </td> <td> <p>2.74</p> </td> <td> <p>2.67</p> </td> </tr> <tr> <td> <p>LT Debt to Equity (MRQ)</p> </td> <td> <p>38.04</p> </td> <td> <p>17.19</p> </td> <td> <p>34.41</p> </td> </tr> <tr> <td> <p>Total Debt to Equity (MRQ)</p> </td> <td> <p>47.56</p> </td> <td> <p>25.15</p> </td> <td> <p>46.63</p> </td> </tr> <tr> <td> <p>Interest Coverage (TTM)</p> </td> <td> <p>9.37</p> </td> <td> <p>60.36</p> </td> <td> <p>49.19</p> </td> </tr> </tbody> </table>

Source: Reuters

Valuations

The company is currently being valued at a Forward P/E of 11x, approximately 40% below market average P/E. PFE has appreciated 10% in the last 5 years. The company has a number of potential drugs in their pipeline, at various stages of the pipeline and is still trading 8% below its mean sell side target price. PFE has an above industry average Payout ratio of 67% and a dividend yield of 3.8%. These valuations and the strong pipe line indicate that PFE has the potential to expand multiples.

Conclusion

The company has also announced positive Phase II trial results for its breast cancer treatment PD-0332991. According to Sell Side estimates the drug has $5 billion sales potential because its initial trail results show it to be 3x more effective than the currently used Letrozole. These three drugs alone have a combined sales potential of more than $10 billion dollars. These drugs in the pipeline and positive news on their clinical results warrant much higher multiples. If we value it on a P/E of 15x, we can get a target price of $34, on consensus earnings estimates of 2013. I recommend investors to buy PFE to enjoy a 3.7% dividend yield and potential 36% return. 


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