Monday, December 04, 2006

Color on news: Pfizer (NYSE:PFE)

Several firms are commenting on Pfizer (NYSE:PFE) after the company announced discontinued development of torcetrapib, its most important pipeline product. This comes after the DSMB found a higher number of deaths (82 vs 51) in the torcetrapib arm of its phase III program.

- Bear Stearns notes that torcetrapib (T) was positioned to extend PFE's Lipitor (L) franchise exclusivity beyond 2011. PFE's lead CETP back-up, CP-800,569 has shown robust HDL elevation/LDL lowering without increased blood pressure in Phase I; but is not expected to enter Ph-3 until 2009. (L) accounts for ~30%/~45% of '07 sales/EPS & ~17% ($4.70) of PFE's DCF value.

The firm removed global (L+T) '11/'12 sales of $3B & $4B from their model. 5-yr ('06-'11) sales &
EPS CAGR's went to 1.6% & 4.8% from 2.3% & 5.6%. In the past 12 months, their 5-yr incremental pharma sales declined to $3.4B from $9.1B. The loss of (L+T) places added pressure on incremental revenues, increasing PFE's need to consider a larger, strategically driven acquisition.

They expect PFE to increase its dividend in the near term. If one assumes a +22% dividend increase (relative to a +17% average over last 10yrs & +26% announced 12/12/05) corresponds to a $1.17 annual dividend (55% payout ratio), & 4.2% yield on Friday's close (current yield 3.4%).

Reits Outperform and $32 tgt due to valuation.

- JP Morgan is downgrading PFE shares from Overweight to Neutral. The shocking revelation that torcetrapib development has been terminated owing to "an imbalance of mortality and cardiovascular events" engenders a litany of challenging questions and uncertainties that they expect to tether share performance for the near to intermediate term.

Firm's DCF analysis reveals an implied value for torcetrapib ranging from $3.49-$5.49 per share, while we see a more tempered share response, perhaps with initial downside in the range of 8-10%. Though indirect proxies, a review of other recent major negative events on drug stock performance suggests roughly a three-month period before recovery of shares to pre-event levels:

Merck and the Vioxx withdrawal (September 30, 2004); Pfizer and the release of data suggesting (admitting that) the COX-2 Celebrex was also associated with some evidence of increased cardiovascular risk (December 17, 2004); and Biogen-Idec and the removal of Tysabri from the market (February 28, 2005). In the weeks following these events, share prices continued to decline. However, following approximately 30 trading days (one and a half months), shares began to recover; and by just over 60 trading days (3 months), shares had returned to levels seen the day after the event.

Reassuring points worth bearing in mind: 1) there is time, with no near-term negative impact to earnings expected through 2009; 2) PFE is very well-equipped (with a sizable cash hoard) to address filling the anticipated post-Lipitor patent expiry hole.

- Banc of America notes that despite the setback, they are maintaining their Buy rating as the firm believes the remainder of Pfizer's pipeline and the company's cost-cutting abilities are underappreciated by the market. However, the firm is lowering their price target by $3 to $28 and expects shares to be under pressure today.

Firm estimates torcetrapib's value at $2-3/shr for Pfizer assuming sales and margins in the range of Lipitor. They have removed '10 sales ($1.3 billion) from their model, reducing 2010E EPS by $0.09 to $2.28.

BAC believes that Pfizer will seek to manage its earnings gap through quickened cost-cutting initiatives, which could account for upside to their cost-cutting forecasts that wthey have kept unchanged, for now. The firm also believes that Pfizer could intensify its M&A strategy to further build out its new product portfolio. With $15 billion in annual free cash flow, Pfizer has the financial flexibility to both raise its dividend and pursue an expanded M&A strategy.

If shares drop more than $3-4, or below $23-24, the firm believes that Pfizer shares would offer an attractive entry point that essentially would provide investors with an inexpensive call option on Pfizer's emerging pipeline and reflect considerable investor uncertainty on Pfizer's future sources of growth. If Pfizer shares were to drop to $23-24, its dividend yield would be in the 4% range, compared to the 5.5% floor levels for Bristol upon generic Plavix 'at risk' entry and Merck after the Vioxx withdrawal. They also believe Pfizer could boost its dividend another 15% next week, translating into nearly a 5% yield.

Notablecalls: I would be looking to buy PFE around the $24 level in the pre mkt as even the downgrades include supportive arguments. But it's going to be just a trade. I tend to believe PFE will be dead money for an extended period.

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