Pfizer Moat Check
Pfizer (PFE) is a world class pharmaceutical company that develops and manufactures leading prescription medicines. This $181 billion dollar company has many competitive advantages that give it a wide moat, which shields it from the pressures of profit eroding competition.
First and foremost, Pfizer has a huge stable of drug patents. Patents grant holders the right to exclude others from making, using, or selling an invention. According to the FDA, Drug patents have a 20-year patent life from the date of the first filing of the patent application. However, the effective length is often shorter, because patents are often obtained before the product is actually ready for sale. Drug companies can apply for patent extensions to recoup some of this lost time, but the extensions cannot exceed 14 years from the product’s approval date. As you can see, patents provide significant moats for a significant period of time. Pfizer’s leading drug patents include the following:
- Lipitor – The most widely used treatment for lowering cholesterol. However, it is starting to face generic competition.
- Norvasc – World’s most-prescribed branded medicine for treating hypertension.
- Exubera – The first inhaled human insulin therapy.
- Geodon/Zeldox – An anti-psychotic medication for the treatment of schizophrenia and acute manic or mixed episodes associated with bipolar disorder.
- Lyrica – Relieves two of the most common types of nerve pain: Diabetic Nerve Pain and Pain after Shingles. Lyrica is also approved to treat partial onset seizures in adults with epilepsy who take one or more anti-seizure medicines.
- Celebrex and Bextra – Approved to treat the joint pain, stiffness, and swelling of osteoarthritis and adult rheumatoid arthritis.
- Eraxis – An antifungal approved to treat candidemia, the most deadly of the common hospital-acquired bloodstream infections, and other forms of Candida infections.
- Stutent – A treatment for two types of cancer, an advanced form of kidney cancer and a cancer of the stomach and intestines called gastrointestinal stromal tumor (GIST).
- Xalatan/Xalacom – A drug used to lower the intraocular pressure associated with glaucoma and ocular hypertension.
- Zyrtec – The most prescribed antihistamine in the U.S. for seasonal and year-round allergies and hives with once-daily dosing.
- Chantix/Champix – A prescription treatment for smoking cessation that became available to patients in the U.S. in August 2006.
- Viagra – The leading treatment for erectile dysfunction and one of the world’s most recognized pharmaceutical brands.
This list is only a sampling of Pfizer’s drug patents. In addition to having the protection of patents, several of the above names have very recognizable brands. I sure you’ve likely seen advertisements and product placements for Viagra, Zyrtec, and maybe even Lipitor. Pfizer has a very impressive drug marketing capability.
Pfizer also has an animal health business line. Pfizer produces Draxxin for treatment of respiratory disease in cattle and swine. The company also produces Rimadyl for treatment of pain and inflammation associated with canine osteoarthritis and soft-tissue orthopedic surgery. In addition, Pfizer produces Revolution, a parasiticide for dogs and cats.
In June 2006, Pfizer entered into an agreement to sell their consumer healthcare business to Johnson & Johnson (JNJ) for approximately $16.6 billion in cash. Shedding their consumer healthcare brands will force Pfizer to focus even more closely on its drug pipeline to maintain cash flows.
Pfizer’s financials also indicate that it has a wide moat. Return on Invested Capital (ROIC) was 16.8% over the past trailing twelve months and has averaged 15.5% over the past five years. Equity has been growing at over 20% over the past ten years and has only recently tapered off. Revenue growth was also averaging above 12 percent over the past 10 years, but it too has halted this past year. Earnings growth has also been above 10% over the past 10 years. Earnings growth was negative last year but has rebounded over the past twelve months. Finally, you got to love 88% gross margins and net margins over 15%. Those kind of margins usually indicate you are dealing with a wide moat company.
Recently, Pfizer unexpectedly stopped all torcetrapib Phase III clinical trials on December 2, 2006. Pfizer reportedly spent $800 million developing torcetrapib as a potential replacement to the cholesterol drug blockbuster Lipitor, which will be coming off patent as soon as 2010. This event is what triggered Pfizer’s recent stock price decline of over 13 percent.
The $800 million development cost appears typical, at least according to Wikipedia. I also recently read that over 40% of drugs that enter Phase III trials fail. Given these facts and Pfizer’s large stable of drug patents, I found Pfizer’s recent stumble to not be out of the ordinary. Pfizer’s wide moat appears to remain intact and the company will likely continue to develop drugs that will propel its future earnings growth. The company will refocus resource used on torcetrapib to other ongoing promising drug development projects.
In the mean time, Pfizer is also using its legal resources to protect its current blockbuster patents. Last Friday (December 8, 2006), Pfizer got a Canadan court to block Teva’s (TEVA) Novopharm from launching generic Lipitor.
My take is that Pfizer will recover with time the way Merck (MRK) has after the Vioxx blowout. The stock is already showing healthy signs of recovery. I will post my valuation of this stock shortly. Please share your comments.
Disclosure: I now own shares of Pfizer Inc. since December 7, 2006.