PFIZER INC. $30 (New York symbol PFE; Income Portfolio, Manufacturing & Industry sector; Shares outstanding: 6.4 billion; Market cap: $192.0 billion; Price-to-sales ratio: 3.9; Dividend yield: 3.5%; TSINetwork Rating: Above Average; www.pfizer.com) is the world’s largest maker of prescription drugs. Its main brands include Lyrica (epilepsy), Celebrex (arthritis), Viagra (erectile dysfunction) and Prevnar (a pneumonia vaccine).

Pfizer also makes popular over the-counter drugs, including Advil (pain relief), Centrum (vitamins) and Robitussin (cough syrup).

These acquisitions tend to cut risk

Developing new drugs is expensive and risky. That’s why big companies like Pfizer often prefer to buy other drug developers with promising products.

In October 2009, Pfizer bought rival drug maker Wyeth for $68.2 billion in cash and stock. That raised its revenue from $50.0 billion in 2009 to $67.8 billion in 2010. However, revenue fell to $67.4 billion in 2011 after the patent on Pfizer’s Lipitor cholesterol drug expired. It later sold some smaller operations, which cut its revenue to $51.6 billion in 2013.

Earnings fell 4.1%, from $8.6 billion in 2009 to $8.3 billion in 2010. Due to more shares outstanding after the Wyeth purchase, per-share earnings fell 16.3%, from $1.23 to $1.03. Pfizer’s earnings then rebounded to $1.11 a share (or $8.7 billion) in 2011 and soared to $2.22 a share (or $15.3 billion) in 2013.

Pfizer recently offered to buy U.K. drug developer AstraZenica (New York symbol AZN) for about $118 billion. However, AstraZenica rejected the offer.

Buying AstraZenica would give Pfizer several promising treatments it is developing, including one for cancer. That would help Pfizer offset revenue it stands to lose as more of its drugs lose patent protection in the next few years.

New drugs have strong potential

However, Pfizer has 20 treatments in Phase III trials that should spur its growth either way, including Xeljanz (arthritis) and palbociclib (breast cancer). It currently spends 14% of its revenue on research.

Besides gaining access to AstraZenica’s products, the purchase would have let Pfizer shift its incorporation to the U.K. after the takeover. That means it would pay a 21% corporate tax rate, compared to 35% in the U.S. However, the proposal faced strong political opposition in the U.S. As well, Pfizer would have to keep operating AstraZenica’s U.K. labs, which could make it harder to cut costs after the purchase.

Sound balance sheet is a plus

Without AstraZenica, Pfizer will probably look for smaller acquisitions. As of March 30, 2014, the company held cash of $33.9 billion, or $5.31 a share. Its long-term debt of $27.6 billion is a moderate 14% of its market cap.

Pfizer will probably earn $2.24 a share in 2014, and the stock trades at just 13.4 times that forecast. The $1.04 dividend yields 3.5%.

The company is also aggressively cutting its costs, mainly by closing plants and offices. These moves should save it $2.9 billion a year by the end of 2016.

Pfizer is a buy.