Why I Own PFE

PFE is the largest pharmaceutical company in the world with $70 B in annual sales. I have owned PFE (off and on) since 2005. Back then stock was depressed because of the headlines regarding the patent cliff of 2010's. The patent cliff is a series of major patent expiration starting in 2010 which was supposed to dramatically reduce the company's sales. The company's sales are tied to around a dozen blockbuster drugs. Here I define blockbuster drugs as those with over a billion annual sales. As an example, Lipitor (a cholesterol drug) was a $10 B drug until its patent expiration in the US in 2011.

Just in 2010-2012, PFE has lost exclusivity in six billion dollar drugs (Lipitor, Geodon, Aricept, Viagra, Xalatan, Detrol). However, PFE is not alone, the entire drug industry is going through the patent cliff together. And I feel the patent cliff headlines have made all pharmaceuticals undervalued. PFE has tackled the patent cliff with consolidation and cost reductions. In 2009 they bought Wyeth, another major pharmaceutical company. This merger was to diversify PFE's sales, and mitigate the patent expirations. And fortunately, the patent expirations will start tapering off, with no major expirations in 2013 and only one (Celebrex) in 2014.

PFE now has almost $70B revenue. The stock trades at $25 and generates $2.20 per share of free cash flow. The stock's dividend yield is 4%. I bought most of my current shares below $20 during the financial crises of 2008-2009. When then as the market tanked, I was looking to buy stocks because of the overall market valuation. Which particular stock didn't matter so much as long as it was not at risk of bankruptcy. Defensive sectors such as health care fit this bill.

From the depths of the financial crises to now, PFE has roughly kept pace with the overall market. Now the PFE stock is a decent investment based on the cash flow alone. The company's R&D pipeline is said to be quite deep. Future products from R&D should at least maintain their cash flow. Furthermore, as the Wyeth merger matures, the synergies will add further to cash flow.

I don't delve into the specifics of the R&D aspects of PFE. The pharmaceutical industry is very leading edge like high tech. And I feel my analysis or opinion will add little to the general knowledge. Instead, I just admit the specifics of PFE's future is unknowable, but the market dynamics are very much in the industry's favour. The pharmaceuticals are a $1 trillion industry worldwide. As countries look to improve living standards, a key goal would be to improve health standards while reining in costs. That means the focus should not be in churning out more and more doctors, who are highly paid, but in using technology to make cheap and decent health care to the masses.

In the US, for example, the coming health care bill called Obamacare will increase health coverage for tens of millions of people. To do so, cost per person will have to go down, so the industry will do anything it can to save money. That appears to be bad for the managed care organizations (MCOs). I disagree. The MCOs cut of the health care bill is small. Cutting MCO profits will do little to dent the overall rising costs. Instead, if MCOs can improve efficiencies in delivery and trim waste, then they will reduce the overall health care cost and make a good profit at the same time.

And as for pharmaceuticals, the increase in people with coverage means more demand for medicine. More demand means more money for the R&D of new medicines. Pharma companies are driven by the profit motive. If governments trim costs by starving them of profits, then they simply cannot afford research.

So overall, the entire health care industry is a large portion of the world economy with lots of room for growth. And I am a low-risk diversified investor. That is the main reason I have held two large cap health care stocks for a while now: PFE and Wellpoint.