Pfizer (PFE) and GlaxoSmithKline (GSK): Value or Value Trap?

There is value involved here as in an important term investors need to be aware of: "value trap."

A value trap is easy to understand -- a former growth stock comes down in price and value, and other investors pile in expecting growth to resume, thus making the lower price attractive. The assumption is that growth will pick up. With PFE and GSK, this is a false assumption -- a very false assumption.

Pfizer saw a 25% decline in U.S. sales of its flagship product -- the leading selling pharmaceutical in the world, and my favorite as it lets me eat mostly what I want to eat -- Lipitor. The king of the statins! The drug is under ferocious pressure from generic Zocor, which it should be, for many people (including moi) take it in low doses to reduce cholesterol or as a prophylactic (the way my internist takes it) in the belief statins head off cardiac disease and other maladies.

ChangeWave surveys predicted this as a generic in a market segment, more often than not, seriously damages or kills all proprietary brands in that segment. And the competitive pressure from Zocor is only going to get greater.

Pfizer has also lost patent protection on other blockbusters, but the real problem lies in "the emperor has not clothes" theme -- there is little in the immediate pipeline to compensate for the coming revenue shortfall.

Any growth this year will come from price increases, not real growth. And the situation will worsen, which is why the company announced major restructuring, a reduction in the sales force and the need to license drugs or acquire biotechs to fill its pipeline. This doesn't sound like a growth company to me.

On another front, GSK may have dodged a bullet since the FDA panel voting to keep Avandia on this market with a very serious warning, but Avandia sales have plummeted and they will continue to do so, as diabetes is a very competitive marketplace.

Should a physician start a new patient on a drug that has been shown, statistically, to seriously elevate the risk of heart disease? GSK also has the same problem as PFE -- a weak pipeline and the need to go outside for drugs, as shown by the recent deal with Targacept (TRGT) for that company's technology and early-stage drugs for a variety of illnesses.

GSK has made a major initiative in vaccines, but this is a low margin business with significant growth potential but not much profit potential compared to other drugs. Glaxo has also announced it will lay a bunch of people off and after declining to put people out on the street also said it will buy back a huge number of shares -- a number large enough that its bond rating was lowered to A1 (two notches down from Aa2) -- as the rating agency Moody's said it did not have enough cash flow to make these buybacks and would have to borrow money to do so.

Again I'll ask, does this sound like a growth company to you?

Bottom line: PFE and GSK are safe-haven dividend and stock buyback plays, not growth companies. If you want to take a risk in biotech and life sciences, you should do so only if the potential returns are worth the risk. For the aggressive growth investor, this is simply not the case for these two value traps.

Comments

The two big pharma giants, Pfizer and GlaxoSmithKline, have come down in price in recent years, gotten stuck; moved up, down and sideways -- and more and more analysts are saying they represent "value" especially in light of this week's FDA vote to keep GSK's blockbuster diabetes treatment Avandia on the market. There is value involved here as in an important term investors need to be aware of: "value trap." A value trap is easy to understand -- a former growth stock comes down in price and value, and other investors pile in expecting growth to resume, thus making the lower price attractive. The assumption is that growth will pick up. With PFE and GSK, this is a false assumption -- a very false assumption. Pfizer saw a 25% decline in U.S. sales of its flagship product -- the leading selling pharmaceutical in the world, and my favorite as it lets me eat mostly what I want to eat -- Lipitor. The king of the statins! The drug is under ferocious pressure from generic Zocor, which it should be, for many people (including moi) take it in low doses to reduce cholesterol or as a prophylactic (the way my internist takes it) in the belief statins head off cardiac disease and other maladies. ChangeWave surveys predicted this as a generic in a market segment, more often than not, seriously damages or kills all proprietary brands in that segment. And the competitive pressure from Zocor is only going to get greater. Pfizer has also lost patent protection on other blockbusters, but the real problem lies in "the emperor has not clothes" theme -- there is little in the immediate pipeline to compensate for the coming revenue shortfall. Any growth this year will come from price increases, not real growth. And the situation will worsen, which is why the company announced major restructuring, a reduction in the sales force and the need to license drugs or acquire biotechs to fill its pipeline. This doesn't sound like a growth company to me. On another front, GSK may have dodged a bullet since the FDA panel voting to keep Avandia on this market with a very serious warning, but Avandia sales have plummeted and they will continue to do so, as diabetes is a very competitive marketplace. Should a physician start a new patient on a drug that has been shown, statistically, to seriously elevate the risk of heart disease? GSK also has the same problem as PFE -- a weak pipeline and the need to go outside for drugs, as shown by the recent deal with Targacept (TRGT) for that company's technology and early-stage drugs for a variety of illnesses. GSK has made a major initiative in vaccines, but this is a low margin business with significant growth potential but not much profit potential compared to other drugs. Glaxo has also announced it will lay a bunch of people off and after declining to put people out on the street also said it will buy back a huge number of shares -- a number large enough that its bond rating was lowered to A1 (two notches down from Aa2) -- as the rating agency Moody's said it did not have enough cash flow to make these buybacks and would have to borrow money to do so. Again I'll ask, does this sound like a growth company to you? Bottom line: PFE and GSK are safe-haven dividend and stock buyback plays, not growth companies. If you want to take a risk in biotech and life sciences, you should do so only if the potential returns are worth the risk. For the aggressive growth investor, this is simply not the case for these two value traps.