Pfizer Facing Trouble After Vytorin Report

Conventional wisdom suggests that investors would do well during an economic slow down by owning shares of drug companies. The idea being that consumer spending on medicine will be strong no matter what happens elsewhere in the economy.

Huge cash flows combined with regulatory patent protection provide unique operating conditions for drug companies and the incentive to invest in research. In addition to current sales, speculators then will value drug companies by evaluating the pipeline of future opportunity.

At Pfizer questions about that pipeline arose in 2004 as patent protected product was feared to be ending for many large selling drugs. More worrisome was a weak pipeline and questions about its ability to bring new product to market.

The result was a depression in share value that has yet to recover. Sure, there have been moments of hope and upward appreciation, but for the most part the last several years have been a big disappointment for investors in Pfizer.

The stock, despite a nice dividend, has been on a downward trend line for several years now. Recently that disappointment continued as the FDA raised questions about the efficacy of its cholesterol fighting drug Vytorin.

Any disappointment regarding future product reinforces the uncertainty around the stock. Add in the likelihood of a government dominated by democrats and investors are likely to be dissatisfied with PFE for a few more years.

As one of those supposedly big bad drug companies the future does not look promising for PFE. A weak pipeline combined with products nearing market competition make for a hostile environment for drug company investors.

We may very well be entering a new era of valuing large drug companies. At a minimum the risks of owning such stocks appear to have risen. Only the future will tell if the rewards merit that risk.

by Hillary Mark |  01/29/08  |  Stocks: PFE,