Dividend stocks: Biosimilar drugs part of Pfizer’s prescription for healthy competition

pfizer

Today, we look at a U.S. dividend stock we believe has excellent prospects in a challenging industry. Pharmaceutical companies face a distinct set of problems, including regulatory hurdles, frequent litigation and growing competition from generic drugmakers. Yet Pfizer continues to find effective responses to these challenges, largely through well-focused research spending and strategic acquisitions. This includes the takeover of a leading maker of biosimilar drugs, an innovative new field. And Pfizer has raised its dividend payout every year since 2010, for a current yield of 3.4%.

Drug stocks operate under distinct negatives. For example, new drugs take years to win regulatory approval, if ever. As well, they face increasing litigation and aggressive competition from generics.

However, we feel Pfizer will continue to overcome these challenges. Its high research spending is letting it replace drugs whose patents are expiring. The company also recently acquired Hospira, an innovative firm that’s successfully developing and selling a new class of drugs called biosimilars. These treatments give Pfizer a new source of growth to offset sales lost to generic drug makers.

The stock is up 65.0% for us since we first recommended it in our July 2011 issue, but we feel it still has plenty of gains ahead.

PFIZER INC. (New York symbol PFE; www.pfizer.com) started up in 1942 and is now one of the world’s leading makers of prescription drugs. Top-selling brands include Lyrica (epilepsy), Celebrex (arthritis pain), Prevnar (pneumonia) and Enbrel (rheumatoid arthritis).

The company is also the world’s fifth-largest maker of over-the-counter treatments, including Advil (pain relief), Centrum (vitamins) and Robitussin (cough syrup).

Pfizer’s revenue fell 19.5%, from $61.6 billion in 2010 to $49.6 billion in 2014. That’s mainly because it sold its nutrition division, which makes formula and other products for children, to Switzerland-based Nestle S.A. for $11.9 billion in 2012. In 2013, Pfizer set up its animal health business as a separate firm called Zoetis Inc. (New York symbol ZTS).

Following its asset sales, Pfizer’s earnings fell 8.9%, from $15.7 billion in 2012 to $14.5 billion in 2014. But it continued to buy back shares, which is why per-share profits rose 7.6%, from $2.10 to $2.26.

Strong competition from cheaper generic drugs has also slowed Pfizer’s growth. In the past few years, patents on several of its top-selling drugs have expired, including Lipitor (high cholesterol), Xalatan (glaucoma) and Geodon (schizophrenia).


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Dividend stocks: First biosimilar drug gained FDA approval in March 2015

In response to rising generic demand, Pfizer is adding new drugs through acquisitions, the biggest of which is its $17-billion purchase of biosimilar-maker Hospira, completed in September 2015.

Biosimilars are close copies of biologic drugs—or treatments made from living organisms, like bacteria and yeast—that have lost their patent protection. Biologics are different from regular drugs, which are typically made from chemical compounds.

Generics are exact copies of chemical drugs. However, biosimilars are not exactly the same as the medicines they replace, as it’s not possible to make exact copies of treatments made from living organisms.

The U.S. Food and Drug Administration approved its first biosimilar in March 2015, and it will likely approve several more by the end of 2015.

The outlook for biosimilars is bright, as they cost about 25% less than branded biologics. Global biosimilar sales could soar from $3 billion this year to $20 billion in 2020.

Hospira should add $0.10 to $0.12 a share to Pfizer’s earnings in its first year. By 2018, the company expects to cut $800 million from its annual costs by eliminating overlapping functions.

In addition to acquisitions, Pfizer continues to invest heavily in creating its own products. In 2014, it spent $8.4 billion (or 16.9% of its revenue) on research, up 25.7% from $6.7 billion (12.9%) in 2013.

Pfizer’s research spending has helped it develop several new drugs, like Ibrance, for breast cancer. The FDA approved Ibrance in February 2015, but only for patients who hadn’t already received treatment for advanced breast cancer. This new drug could eventually generate $5 billion of annual sales.

Pfizer is also optimistic about rheumatoid-arthritis treatment Xeljanz, which it now sells in 35 countries. The company is currently researching Xeljanz’s effectiveness at treating other disorders, including psoriasis and inflammatory bowel disease.

Meanwhile, Pfizer has teamed up with rival drug maker Bristol-Meyers Squibb to develop and sell anti-stroke drug Eliquis. The partners are now conducting tests to see how well Eliquis treats blood clots in legs and lungs, and certain forms of heart disease.

Pfizer is in a strong position to keep making acquisitions and developing new drugs. As of June 28, 2015, its long-term debt was $26.7 billion, or just 13% of its market cap. It also held cash and investments of $30.3 billion, which helped it pay for Hospira.

The extra cash flow from Hospira should also give Pfizer more room to increase its dividend; the company has raised the payout each year since 2010. Its current annual rate of $1.12 a share yields 3.4%.

Even with the Hospira acquisition, Pfizer’s 2015 earnings will probably drop to $2.08 a share. That’s mainly because the high U.S. dollar is hurting the contribution from its overseas operations, which supply nearly 60% of its revenue.

However, its 2016 earnings should rebound to $2.32 a share, and the stock trades at just 14.2 times that estimate.

Recommendation in Wall Street Stock Forecaster: BUY

For a recent report on another of our top buys among U.S. dividend stocks, read 3M Company sustains long history of dividends with dynamic growth strategy. For our view on one aspect of dividend investing, read Can you use the ex-dividend date as an investing strategy?

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