Thanks for your comments. I have only looked at the numbers and not read the annual reports yet on PFE. Thanks for your heads up on what to look for, and what to be cautious about with PFE. In general I have not had much luck with bio-tech or pharma, so my efforts may be better used in other sectors.

I was looking at PFE and (personally) I’m not sure that I’m overly excited at or under $20. The numbers look right, but we have to predict the future regardless of the past. As Tom pointed out, some lost revenue from its blockbuster drugs will likely result in lowered owner earnings. Using $11 billion as a startign point, intrinsic value appears to drop to the low $30s.

I’m not entirely crazy about it.

[Full Disclosure: I own PFE, as well, for the reasons already listed -- banking on reversion to the mean, given its cash stockpile.]

PFE is definitely an interesting company to take a look at, as it generates a ton of FCF and has grown it at a huge rate in the past.

One caveat to your analysis above for the worst case scenario:

When I ran Joe’s spreadsheets a few weeks ago the numbers looked really good, so I dug into the quarterly and annual reports on EDGAR. Now these predictions have changed a bit over time, but management is predicting that FCF will drop for 2007 (between $10b and $13b in various reports). FCF estimates for 2008 were between $12b and $18b.

So, your worst case scenario of zero growth is probably not conservative enough based on the drop in FCF due to losses of patent protection on certain key drugs.

With that said, it wouldn’t surprise me if PFE does in fact grow its FCF as in the past, particularly through smart and targeted acquisitions. However, the above changes the “worst-case” and the margin of safety required.

I figured it was just a typo. But it doesn’t change your conclusions. If PFE gets around 20 I may start nibbling.

You are correct it is 33.9%.

My bad.

Giggsy

I too have been looking at, and tempted by, PFE. I got the same numbers you did except for equity growth I got 33.9% instead of 39%.

Great post as always!

Had a request regarding Pfizer. If I remember correctly you had mentioned in one of your earlier posts that you would take a look at it. I am sure you are probably inundated with a lot of request and is probably siiting on your to do list. Anywho.

What do you think about PFE?

With problems such as: Patent expiration of Lipitor (2010), Neurontin, Zoloft, Zithromax, Diflucan, Accupril, Norvasc and Zytrec (2007).

Also Torcetrapib failed in its clinical trial.

All of these will probably trim 15B+ from their sales.

Pluses: PFE has a lot of cash (40B+), little debt and 90+ drugs in the pipeline.

I ran the PFE numbers from 1997-06 and these are the median numbers:

Equity: 39%

FCF: 39.4%

CROIC: 16%

With all the problems PFE is having its not going to continue with the same growth. So I slowed the FCF growth from 39.4% to

1) YEAR 1 -10 = 14% , YR 11-20 = 5%. IV Value = 44.59

2) YR 1-10 = 10%, YR 11-20 = 5%. IV Value = 37.04

3) YR 1-10 = 5%, YR 11-20 = 0%. IV Value = 24.38

4) YR 1-10 = 0%, YR 11-20 = 0%. IV Value = 21.56

I have not included the stock buy back of 18B in the outstanding shares (If I do then the IV drops). If I take the worst case scenario that the FCF does not grow at all (# 4), the IV (with 25% MOS) would be around $16.00.

My assumption is based that out of 90+ drugs in the pipeline, there will be atleast be some that will provide 5% FCF growth for the next 10-20 yrs, while it gets its house in order.

Sorry to get long winded.

Please feel free to poke some holes.

Thanks.

Giggsy