Pfizer Shares Still Attractive

Jeremy Glaser: For Morningstar.com I'm Jeremy Glaser.

I'm here today with Damien Conover, the associate director of health care analysis at Morningstar, to take a look at Pfizer's earnings report and see why investors are cheering some of the things they saw in it.

Damien, thanks for joining me.

Damien Conover: Thanks for having me, Jeremy.

Glaser: So Pfizer stock is up about 4% right after the announcement of their earnings. Why are people excited about this? This is a pretty big move for a stock that size.

Conover: It is a big move for Pfizer. It's a very big company, 4%, that's a big deal, and I think there are couple of elements to why it's moving so much.

I'd say one of the key points that we would point to is that Pfizer is now implementing a new stock repurchase program; it's about $5 billion worth of Pfizer stock that should be completed by 2011. So by the end of 2011, $5 billion worth of shares repurchased, which should really help Pfizer mitigate some of the patent losses that it is facing and really help stabilize that bottom line.

Glaser: How much are the changes with the stock repurchase program do you think are driven by the management at Pfizer?

Conover: It's a great question. So Ian Read recently took over as the CEO of Pfizer, and I think the stock repurchase program is largely a direct result of his new management there. I'd say on top of the stock repurchase program, Ian Read has also laid out a plan of reducing R&D costs, which I think is going to be very important for Pfizer, because if you look historically, Pfizer hasn't been as productive as it's needed to be from its research and development efforts. And I think cutting that cost a little bit will bode well for the company. I think they can redeploy those resources by making acquisitions as well as doing some joint development efforts with smaller, more entrepreneurial biotech firms that could help replenish the pipeline more effectively than doing some of those efforts internally.

Glaser: The management change was a bit of a surprise, but you are comfortable with Read at the helm?

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Conover: Yes, you know, it was a surprise. The previous CEO, Jeff Kindler, I thought was doing a fine job. I think Read is going to follow in his footsteps in the sense that I think we'll see some cost-cutting efforts, more deployment of resources to emerging markets where there is a lot of growth potential, and I think he's going to add his own touch, Read's own touch, to management style through the stock repurchase program, through cutting R&D, and also I think there is a potential for Pfizer to spin out some of its businesses that we think could be under-appreciated by the market, and that could actually unlock some value for Pfizer.

Glaser: You mentioned that the firm's pipeline could pose a bit of a problem in the future. Can you shed some light on what we learned this quarter about the firm's pipeline?

Conover: Sure, so this pipeline I'd say is not quite as strong as where it needs to be to help offset all the major patent losses that are coming up for Pfizer. However, that being said, in the quarter they re-emphasized a couple of really key products that I think will be very, very important for Pfizer.

The first one is a JAK inhibitor; now this is a product for rheumatoid arthritis--very, very large patient population out there, and it could be just a very, very important blockbuster for Pfizer, and the key thing to remember about this JAK inhibitor is that you can take it orally, versus all the other molecules out there are injectable. So I think that could really be a differentiating point for Pfizer in gaining market share.

The only other product I'd mention that was highlighted in the earnings release is a product called an ALK inhibitor, which works very well in patients with non-small cell lung cancer. It only works for a small group of them that have a specific gene mutation. But if you have that mutation, this works extremely well; we think another blockbuster coming out of Pfizer's pipeline.

Glaser: How do you compare Pfizer's results to some of the other big pharma firms that have reported so far for the quarter?

Conover: Well, so far I'd say most of the results are largely coming in-line with what we're anticipating. That's largely a little bit of weakness on the top line, a little bit of strength on the bottom line, and that goes back to our overall thesis on the group that we are expecting a lot of cost cuts to offset some of these patent headwinds.

So I think it's really largely in-line results. But I think what sets Pfizer apart is more its forward-looking guidance and the stock repurchase program. Good guidance, strong stock repurchase program, hence we see the stock up today.

Glaser: Finally, what's your view of the valuation of the shares right now?

Conover: Currently we have a fair value of Pfizer of $26, so we think there is room for upside even on top of the movement of the stock today.

Glaser: Damien, thanks so much.

Conover: Thanks, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser.