You may likely get two for one from this titanic giant

If you don’t know this company, you must be an ignorant about the pharmaceutical industry. This is the largest pharma company in the world and has been constantly in the news for years. The most recent and famous one was the failure of its trying to do the largest buyout of another massive pharm and move its tax headquarters to Ireland. It failed because this move was so big and influential that it caught up the attention from the Obama administration, which in turn issued new rules to kill the deal. Of course I’m talking about Pfizer (PFE).

 

Pfizer has got this gigantic size not because of its internal growth but rather through dozens of acquisitions over years.  The most famous one is probably the buyout of Warner-Lambert Pharmaceutical, from which it got the cholesterol lowing drug Lipitor,  the world's best-selling drug of all time with more than US$125 billion in total sales over approximately 14.5 years (the peak annual sales over $12 Billion!). Unfortunately Pfizer could not continue with this momentum and has been largely lagging behind for almost 2 decades till now. After reaching its all time high around $45 back in 2000, it got crashed to as low as $17 during the financial crisis in 2009. It has quietly recovered most of its loss since then but I bet not many people are interested in it anymore. It is almost like a company of the past without much future. But I think a new era may be coming soon for Pfizer. While it seems there is not much excitement left for Pfizer, under the surface there are something quite interesting ongoing. Let me point out a few things here:

• First of all, PFE is quite cheap relatively speaking, at a forward PE only at 13. With its gigantic portfolio with hundreds of drugs on the market, it is a cash cow, churning out free cash nonstop. It has a reliable high dividend yield around 3.5% at the moment. At the zero interest environment, you can virtually treat Pfizer as a bank to produce interest income for you.
• Beyond that, Pfizer is doing something smart lately to beef up its future earning power. For one, it recently acquired  a company called Hospira, which was famous for its enviable basket of ingectables. But more than that is Hospira’s strength in biosimilars. Biosimilars are basically the generic (off-patent) medicinal drugs of biotech products and they are estimated to be a $35 billion market in the next few years . Biotech drugs are hugely profitable and a high margin business, but due to the technical complexities in the manufacturing process, not many companies can replicate such generic products. Pfizer is one of them and with Hospira on board, it will be positioned very well in this new hot money making area moving forward. Towards this end,  it has just announced that it will build a $350 million facility in Hangzhou China to manufacture biosimilars. I guess I don’t need to emphasize what will be the biosimilar market size in China where the brand name drug prices are skyrocketing high. This is indeed smart move by Pfizer.
• Pfizer got hit very hard due to the loss of its patent in 2011 of the bestselling drug, Liptor. But it is testing a new follow up drug, bococizumab, currently in the phase 3 trials. If successful, this new generation cholesterol-lowering drug will have a huge advantage over Liptor in the sense that it can not only reduce  lipids as effectively as Liptor, it can also prevent cardiovascular problems in patients, a kind of one stone for two birds drug. I think this will turn out to be potentially another all time best-selling drug if successful.
• Now in the hottest immune-oncology area that Pfizer missed the boat initially. But it is catching up and has some promising drugs in late phase clinical trials as well. I think it will have something promising coming out in the near future.

So you may ask why I’m talking about “getting two for one” in the title? Well, Pfizer is undergoing significant reorganizations internally by grouping its businesses into two major parts: one consisting of established medicines and another with high-growth innovative products and pipelines. It has also sold non-essential assets like nutritional and animal health business. By doing so, Pfizer will likely be splitting into two companies in the near future, possibly towards the end of the year. The Street loves the game of splitting of a company as it means a more focused company doing what they are better to do. If this deal comes true as I’m expecting, the PFE stock holders will get two stock shares from each Pfizer share: one with a company for massively profitable established-products and another one with the potential of explosive growth. Of course, don’t expect an immediate jump of the total value of your shares. Initially it will be more or less the same between the value of the Pfizer stocks pre-split vs the combined value of the 2 stocks post-split. But historically the split is usually very good and profitable for the stocks of interest down the road. I got my first hand experience with the tobacco company, Altria  (MO) years ago. From MO, I got free shares of the child company Phillip Morris (PM) in 2008. As of now, MO has not only totally recovered from the discount due to the split, but has gained 2 times over its pre-split price. PM has also more than doubled for me since I got it for free. On top of that, I have got high dividend incomes for years from both companies. I’m more than happy by holding MO through its split and continue to hold both for my retirement portfolio. I think we may see something similar for Pfizer if it indeed splits to two. If you are interested in value stocks for long term, don’t miss this potentially lucrative opportunity!