Pfizer is a major pharmaceutical company headquartered in New York. Founded in 1849, Pfizer evolved into the pharmaceutical behemoth it is today through internal innovation and, more recently, acquisition. Based on revenues, Pfizer is today the second largest pharmaceutical company in the world. Only Johnson & Johnson is larger.

Pfizer has languished in the past few years: hit by imminent patent expirations and a lack luster development pipeline, the stock hasn’t performed well. Is there hope for this former bellwether of the pharmaceutical industry? Even though Lipitor is expiring, it's beginning to look as if things are improving for Pfizer.

Pfizer is one of the more widely held companies among individual investors.  A member of the Dow Jones Industrial Average since April of 2004, Pfizer has a long history of innovation and growth.  For almost seventy years, Pfizer distinguished itself in having a steadily increasing dividend: this trend stopped abruptly when the company merged with Wyeth and the dividend was summarily cut in half.

The current drug portfolio of Pfizer illustrates both its recent acquisitions and the range of its internal research capabilities: a range that is currently being reined in.  Its major blockbuster drug, Lipitor a $12 billion blockbuster, was introduced into the Pfizer portfolio through the merger with Warner Lambert, which was announced in 1999.  Other leading drugs include Caduet in the cardiovascular market, Celebrex a leading drug in the osteoarthritis market, Chantix to suppress the desire to smoke, Detrol in the bladder control market, Enbrel for in the rheumatoid arthritis market, Lyrica in the pain market, Norvasc in the hypertension market, Spiriva for breathing concerns, Viagra, the drug which made Pfizer a household name in 1998, in the erectile dysfunction market, Zeldox in the CNS market and Zyvox in the antibacterial market.  The fact that many of these branded drugs are household names is testament to the marketing budget, in fact the size, of this company.

While Pfizer has a strong discovery arm, the company is first and foremost a successful marketing company.  It often enjoys pride of place in many therapy classes thanks in no small measure to its acumen in direct-to-consumer (DTC) marketing.  Part of this skill involves recognizing opportunities.  For many years, Pfizer was a company that grew organically; this situation changed in the 1990s through successive mergers with other companies, each of which had a leading drug that was added to the Pfizer franchise.  The first major merger occurred in 2000 with Warner Lambert, followed a few years later with Pharmacia.  The most recent merger, which closed recently, was with Wyeth.  While Pfizer has been successful in its efforts with major companies, it also has development or marketing deals with scores of emerging pharmaceutical companies.  When I recently ran through a database of major deals involving Pfizer, well over one hundred programs in the clinic passed the screen.

The Wyeth merger is interesting in that it’s unlikely to return all the benefits discussed when the deal was first announced.  In the late 90s the Economist magazine ran an interesting analysis of pharmaceutical company mergers which illustrated that they essentially destroyed shareholder value.  Of course, the big imponderable is what would have occurred had the merger never happened.  Nonetheless, the analysis belied the promises of management about the synergistic benefits to shareholders of such combinations.  In Pfizer’s case, it can be argued that the merger with WL increased shareholder value: PFE had a much more ambitious marketing program for Lipitor than did the innovator of the drug.  The deal increased Pfizer’s revenues by a cumulative value in excess of $60 billion.  The Pharmacia deal probably bought less value, but at least shareholders ended up with Monsanto, which outperformed pharma companies for many of the past few years.

Wyeth does a number of things for Pfizer.  The cynic in me says that a merger buys management more time: whatever happens to the stock price, blame the merger and refer to experts that assure you that mergers take two to three years to work—true, but not that gratifying.  It shores up company financials; something that Pfizer needs with the pending loss of Lipitor.  It also introduces Pfizer into macromolecules, an area where Wyeth is experienced.  The merger complements the current offerings of Pfizer and introduces the company into markets such as vaccines where it had little if any presence.  Pfizer may also have some small wins.  Wyeth enjoyed a philosophy of outsourcing the bulk of its manufacturing needs; Pfizer has excess capacity.  It may be possible for Pfizer to bring material in-house giving better capacity utilization, thus avoiding having to either shutter or sell more capacity in a market where there’s a glut of such offerings.

The first quarter results recently reported by the company were important as they highlighted the fact that the company was on track to make its 2010 numbers.  I have looked at the likely revenue growth of the combined companies, together with the profit margin.  Pfizer should hit $2.17 in earnings this year and would be closer to $2.25 in 2011: it’s a paltry 3.6% increase but keep in mind it includes the loss of a major, $12 b franchise, Lipitor.  Based on its historic PE behavior and its projected earnings growth, I believe that Pfizer should see improved fortunes, with the stock trading in the $19 to $25 range.  On Friday, the stock closed at $16.20: hitting the median projected price of $22 in 2011 represents an increase of 36%; $19 is a more modest but still impressive 17%.  I am continuing to add Pfizer when its stock dips below $16: it’s a long-term investment.  I think in the next two or three years as Pfizer realizes the benefits of the recent merger, the company should start to turn around.

The bottom line is that Pfizer looks like a buy right now for those with a long-term investing horizon.  The company should return 17% in the next twelve to eighteen months.  Dividends should give that return an extra four to six percentage points over the same period.