Marcial: The Formula for a Pfizer Recovery

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Thomas' estimate is in line with Pfizer's historical growth rate. Thomas expects operating profit margins to jump to 42% in 2008 from 2007's 37%, and the return on equity to rise to 26% from 2007's 21%.

One reason behind the stock's recent drop—from $19.40 a share on May 29 to $18.52 on June 5—was Goldman Sachs' June 5 downgrade to neutral from buy. Goldman analyst James Kelly emphasized what's been obvious all along: The company is facing "substantial growth challenges because of Lipitor," the world's largest-selling cholesterol-lowering agent and the biggest drug in any therapeutic category, which produced sales of $12.7 billion in 2007. Lipitor loses its patent protection in 2011. That's the biggest hole Pfizer has to plug. Lipitor accounted for 26% of Pfizer's total sales in 2007. Undoubtedly that is what's scaring investors.

Kelly notes that since Goldman added Pfizer to the firm's buy list on Jan. 4, 2007, the stock has fallen 28.7%, vs. a 2.9% drop by the Standard & Poor's 500-stock index. On June 2, just a few days before Kelly downgraded the stock, he had reiterated his buy recommendation. In this earlier report, the headline was "Pfizer's oncology pipeline continues to show promise." He noted that in its presentation at the recent American Society of Clinical Oncology conference in Chicago, Pfizer disclosed data about its line of oncology products that challenged "standard-of-care therapies head-on, including lung cancer, pancreatic cancer, kidney cancer, and liver cancer." No single product, Kelly argued, "could fill Pfizer's patent hole, but oncology could represent a major contribution." (Goldman has done investment banking for Pfizer.) Kelly is now one of 14 analysts who rate Pfizer a hold, vs. 8 who recommend it as a buy. Two have outright sell recommendations.

The Future Lies in Compounds

The loss of patent protection on some of its other major products, including Norvasc, Pfizer's cardiosvascular drug, has reduced the company's overall sales. But let's not forget that all this unnerving stuff is already reflected in the stock price. The good stuff—the compounds that Pfizer is banking on for future growth—isn't yet reflected in the stock. One example: The company's emphasis on cancer drugs, where it is ramping up spending on research and development.

Pfizer says its oncology R&D pipeline is "robust and growing." Some 22% of its overall budget is now dedicated to oncology R&D projects, currently with 22 innovative compounds in clinical development. Pfizer's oncology unit expects to start seven Phase II studies this year, focusing on four types of cancer: non-small-cell lung cancer, renal cell carcinoma, prostate cancer, and hepatocelluar cancer. Apart from its oncology projects, Pfizer has 16 molecules in its pipeline that are in Phase III clinical trials, of which four are for follow-on indications in already approved products. "Pfizer has the largest Phase II pipeline in its history, and it wants to have 15 to 20 regulatory submissions between 2010 and 2012," notes Thomas of First Global markets. Pfizer's goal is to have up to 28 late-stage programs by the end of 2009.

The big problem for Pfizer's stock is that investors have become impatient because of its sluggish performance in the past two years. But those who take advantage of this cellar dweller now should receive a healthy bounty in a year or two, maybe even sooner.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.