How to Play Pfizer’s
Buyout Binge
by Rob Fannon, editor of Phase 1 Investor
October 13, 2006
Last week, Jeffery Kindler made a wild statement…
Kindler, the new CEO of drug giant Pfizer, announced his company will soon become the world’s No. 1 biotech company.
To put this claim in perspective, $80 billion Amgen sits on top of the biotech world right now. Why would Pfizer, a $200 billion company, be aiming downward? Because biotech drugs are the future of medicine.
Most of Big Pharma’s top-selling drugs will face generic-drug competition within the next few years. Biotech drugs are just now coming of age. They have longer patent lives, work better, and cost more.
So, how is Pfizer planning to reach the commanding heights of biotech? Cherry-picking.
Fresh from the $16.6 billion sale of its consumer-health products division, Pfizer plans on using that cash to acquire drugs and companies in the biotech industry. The company also plans to dedicate an equal amount of cash to stock buybacks during the same time period.
As investors have found out over the past few years, Big Pharma isn’t the growth industry it once was. Growth premiums have been replaced by dividends. Pfizer has a 3% dividend yield. Industry peers, such as Merck (MRK) and Bristol-Myers Squibb (BMY), tout yields of 6% and 5%, respectively.
These drug giants are closer to sales-and-marketing machines than research-and-development shops. Hungry to fill the distribution channels it’s built across the years, the pharmaceutical industry will be mining for new products from the biotech field.
Big Pharma is turning to pricier biotech drugs with longer patent lives to replace a slew of traditional drugs that face patent expirations.
Biotech turned 30 years old this year. The sector, once characterized only by its technology, is finally producing products with real sales. Pharmaceutical companies are sitting on the sidelines simply picking out the products they deem superior. Even at premiums of 30% to 50%, the acquisitions and product deals are great investments for Big Pharma.
As far as Pfizer becoming the world’s top biotech company, don’t expect it anytime soon. However, the company’s attempted march to the top is fantastic for biotech investors. Expect valuations in the sector to creep up from bargain-basement levels… and huge, quick gains for the shareholders of biotech buyouts. Take AnorMED (AOM.TO) shareholders, who are sitting on a 125% premium in a bidding war for the Canadian biotech.
Just as the best natural-resource investors try to invest in the most likely acquisition targets, the best medical investors will focus their attention on biotech firms that the giants, such as Pfizer, will gobble up to stuff their drug pipelines.
Good investing,
Rob Fannon
