Hello all, I have followed this thread for some time but never posted. Yesterday I piled into PFE and also picked up an additional position in PPH. Just thought I would throw out reasons why I feel the Drug sector and PFE in particular are extremely undervalued.
The major Pharmas have all been hit by the "perfect storm"! Public relation problems concerning charging more for drugs in the U.S. than other countries. The Vioxx disaster and the questions concerning all COX-2 inhibitors. The questionable effects of the out come of the election. Probably the two biggest clouds overhanging the drug sector is the expiring patents on $B drugs and the onslaught of generic drugs. Now the US FDA has ordered new youth warnings on antidepressants, raising even more questions. Throw in questionable pipelines and I have almost talked myself out of even considering this sector. I am sure some of you can throw some more negatives on the pile just for good measure. Also there are arguments that the day of the "mega $B drug" is over and personalized drugs are the future.
However, one of the secular trends that is a certainty is the aging of the baby boomers. Another trend is the overall reliance on taking a pill for anything that ails one and this is a trend that includes more than just the aging baby boomers. Also this trend is not just an American phenomenon but a world wide trend. The aging population wants drugs! Where are they going to come from.
Many Pharmas that have historically sold at a market premium and are now selling at a market discount. This is not to say that the drug sector can not sell at an even bigger discount, it has before. However IMHO the negatives are already priced into the drug sector. Most Pharmas have forward 05 PE's in the teens. Why am I optimistic on this sector. FREE CASH FLOW! These companies throw off huge FCF. This allows many options that are all shareholder friendly. Increased dividends, stock buy backs, and the solution to questionable pipelines, acquisitions. JNJ over $9B, LLY over $1.7B, BMY over $2.5B and PFE over $10B in free cash flow. How many Biotech Phase II or Phase III drugs can they buy for $2B. I am not worried about their pipelines. I know a couple biotech companies with late stage PhaseII and PhaseIII drugs that I would love to be bought out. Regarding generic drugs, most large drug companies have their on generic subsidiaries. Last week Pfizer launched a generic version of its own blockbuster anti-convulsant drug Neurontin. This doesn't stop the loss of revenue from a blockbuster drug but it shows how the Pharmas are adjusting. The drug companies have the infrastructure in place and they will deliver the drugs one way or the other. When it takes close to 10 years and over $100B to get a drug to market there are not many options other than to go through the big Pharmas who have the $'s and expertise. Because of their $s it is difficult if not impossible to enact legislation that will materially affect the drug sector. Enough
My choice of undervalued Pharmas is PFE. As already mentioned they have cash flow of over $10B and a forward 05 PE of 12. This is the same company that historically sells at a premium to the market(pe of 25-30). I believe that all the recent bad news(and some of the bad news actually is good news for PFE)is in the current stock price. PFE has $17B in cash and a debt/equity ration of .28. Using a discounted cash flow model PFE is valued at about $60, which is just one conservative method of valuation. I'll take $33 for starters, which is half way between the 12 month high and low. PFE definitely has some potential problems with their COX-2 inhbitors and all the above mentioned problems affecting the drug sector.
Comments?? Would love to hear the negative views.
Disclosure; very healthy positons in PFE, PFE Calls, PPH, and FRX.
The charts look ugly!! We are talking the loss of hundreds of billions in market caps!
stockcharts.com[m,a]daclyyay[pb50!b200!f][vc60][iUb14!La12,26,9]&pref=G |
