Biotech Values

[DewDiligence]

PFE’s EPS guidance for 2012 (the year after Lipitor goes generic) is $2.25-2.35. At the current share price, you’re paying only 6.3x 2012 EPS and you’re getting a 5% dividend yield.

How do they make up for 12 billion in lipitor sales with a gross margin of 85 to 90 percent.

You’re a little high on the Lipitor gross margin,* but that’s not the key metric; rather, the key metric is the worldwide operating margin for Lipitor after selling and marketing expenses, which is about 45%. Multiply that by $11.5B in annual sales and you get about $5B in Lipitor operating profit, excluding any allocation for R&D.

Cost-cutting pursuant to the Wyeth acquisition will increase PFE’s annual operating profit by roughly as much as the $5B decrease from Lipitor cited above. On top of these savings, the Wyeth deal greatly boosts PFE’s after-tax return on equity by leveraging the balance sheet and exploiting the tax deductibility of interest payments on debt. All told, PFE’s EPS will get more of a boost from the Wyeth deal than it will lose from Lipitor’s going generic.

*You were probably thinking of the US market rather than the worldwide market.