I wrote earlier that the pharmaceutical industry as a whole is undervalued. One name that stands out above its peers in the $670 billion market is Pfizer. The company has taken a severe beating on wall-street and is a bargain that cannot be ignored. The following are the investment rationale and potential risks to owning this company:

Rationale
    
Trailing and forward P/E of 14.56 and 7.72, an all-time low

• Large size is an important competitive advantage over peers – marketing leverage, greater ability to make acquisitions and form alliances
• Deep breadth and depth of drug portfolio
• High foreign diversification – internal sales accounted for 52% of 2007 revenues
• Dividend yield of 6.6%, highest in industry. Dividend also backed by $35 billion cash and $7 billion long-term debt
• Strong demographic growth in the elderly - approx 18% of Pfizer’s sales from drugs for seniors
• Cost restructuring program expected to save $2 billion annually by end of 2008
• Industry and company concerns are already reflected in the stock price and good news are not. Any positive news will likely significantly increase the stock

Risks

• Lipitor patent cliff in 2011-2013, currently accounting for 26% of  total 2007 revenues
• Generics will continue to grow and seize market share
• Potential setback for the entire industry if Democrats win the next office
• Pharmaceuticals is a risky business – investing several hundred million dollars upfront for a short window of opportunity (approx 10 year patent when you take into account the time to develop a test a drug)
• R&D productivity, pipeline failures and clinical trial risks

Disclosure – Author has a long position in Pfizer