Pfizer Needs a Healthy Dose of Investor Love

NEW YORK (TheStreet) -- Relatively weak revenue growth has been reported by several of the major drug companies, and much of the excitement surrounding all things health care has begun to dissolve. Shares of Pfizer (PFE) still look cheap, but the weak momentum has prompted investors to poke around at management's recent decisions.

While Pfizer didn't end the year as strong as management would have like, it's not yet time to overreact. To keep citing the spin-off of Zoetis (ZTS) as if it were some sort of calamity is crying over spilled milk, at best. It's been almost a year. There is no basis to support the notion Pfizer's revenue numbers would have been meaningfully better had it kept Zoetis as part of its core operation.

Prior to the spinoff, investors were incessantly complaining about Pfizer's size. The company was seen as "too big" to innovate or return value back to shareholders. Last year, however, Pfizer's stock soared 26%, which beat the S&P 500 -- and this doesn't even include the company's 3.3% dividend yield and the fact that it boosted its share buyback program by $10 billion.

You can't have it both ways. Pfizer's growth will come. It's just going to take more time.

The thing to remember with this story is that although revenue was down 3% year over year, Pfizer is still producing on the bottom line. From an operational perspective, the company is posting the sort of margins Eli Lilly (LLY) and Novartis (NVS) would kill for. When you consider Pfizer's operating margin beats Bristol-Myers Squibb (BMY), a company the Street happens to love, there's clearly been a disconnect with Pfizer's absolute results.

Now, I'm not suggesting the results were exceptional. But this isn't a case where Pfizer's management tried to sell them as if they were huge accomplishments. The other thing is, even though the revenue number seemed unimpressive it was still good enough to beat the consensus estimate by roughly 1%. The Street, somehow, missed that fact. Instead, analysts focused on the company's operating income, which was seen as "weak" -- even though the number met expectations.

Don't confuse anything I'm saying here as some type of rally to get investors excited about the stock. What bothers me is how convenient it is to bring up arguments that management's past decisions were solely responsible for this quarter.

It's true that management can't be completely absolved of all responsibility. At the same time, this slowdown we are seeing should not have come as a surprise. This was expected since the October quarter. In that regard, we need to ask if there is really a slowdown at all. While it's reflected in the 3% revenue decline, there is also strength when looking at Pfizer's segmental performances.

For instance, as Pfizer's pipeline continues to be cited as weak, management continues to offset that perceived weakness by posting close to $3 billion revenue in emerging markets. This was close to 10% year-over-year growth.

So although the Primary Care division has struggled due to expiring patents of blockbuster drugs like Lyrica and Viagra, it's nonetheless impressive the company is still able to produce 11% growth for Lyrica. And this is while other branded drugs like Enbrel and Prevnar are growing moderately better at 5% and 3%, respectively.

Analysts, many of whom can never find anything positive to say about Pfizer, saw things differently. They didn't believe the company showed enough strength in the pipeline to completely support managements maneuvering. On a relative basis, fears about Pfizer's pipeline still seem misguided. When compared to, say, Merck (MRK) or Johnson & Johnson (JNJ), Pfizer's pipeline status are not as bad as they seem.

It really comes down to how much faith you have in Pfizer to right this ship. Management understands what it must do and has listed the pipeline at the top of the to-do list -- including adding resources towards cancer-fighting drugs like Palbociclib, which is now in Phase III trial and used for patients with advanced, recurrent breast cancer.

All told, I like Pfizer at this level, especially since it has gotten less popular. I won't disagree that management needs a healthier dose of drugs, but that's different from saying that management is failing as a team. That's just not the case. Not when margins continue to show strong improvements.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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