In a period of economic distress, owning stocks with stable cash flows is a great way to avoid the carnage found in other parts of the market. One sector traditionally known to provide consistent cash flow to investors is the pharmaceutical industry.
Patent protection on drugs provides the industry with the ability to generate revenue unencumbered by competition. Investors generally pay a premium to own a piece of that stream -- no matter what is happening in the economy.
During the last few years, market premium for drug companies has been diminished. As drugs from the major pharmaceutical makers come off patent, revenues and cash flow suffers.
That fact explains why drug companies invest so much money on research and development. When older drugs come off patent they are replaced by a steady stream of new drugs.
What happens when that pipeline goes dry? Obviously, the company is not worth as much.
That has been the situation at Pfizer (NYSE: PFE). During the last five years, we have been hearing about a dwindling drug pipeline with no sign of abating. During that time, patents for working drugs only aged
As a result, shares of PFE have fallen in value by more than half during that same time period. As PFE stalwarts come off the market there has been little to replace them. Now the clock is ticking on its huge cholesterol drug, Lipitor.
That $12 billion-per-year money-maker is set to come off-patent in 2011. Revenue is expected to be lower as generic versions of the drug come to market shortly thereafter. What will come in its place?
Nobody knows, and that vacuum explains why the stock continues to struggle.
Yesterday, the company is out with statement suggesting that acquisitions may be the best way to grow its business. PFE will look at big deals, small deals and anything in between as a way to supplement the loss of Lipitor revenue.
I don't like this news one bit. In essence, the company is admitting that its pipeline is dry. There is nothing coming that will replace Lipitor and those drugs that come off-patent thereafter.
Acquisitions are no panacea. Even with stock prices down significantly in 2008, any worthwhile acquisition will require PFE to pay a premium. In addition, there is a long history to show that acquisitions, in most cases, fail.
Will PFE be any better at the game? I don't think so.
In fact, I would use the announcement as a justification to sell the stock short. This dead carcass is going to see $10 before it sees $20.
Jamie Dlugosch is a contributor to InvestorPlace.com.
Reader Comments (Page 1 of 1)
1-14-2009 @ 12:18AM
adam hartung said...
Pfizer and the other drug behemoths must wake up that their approach to disease management is increasingly out of date. Now it is genetic drug programs and nano tech that are producing the greatest results. Their old approaches, based upon outdated Success Formulas relying on entry barriers created by old technology and government regulation are out of date. Investors had better be ready for a significant shift in value. Read more at http://www.thephoenixprinciple.com