Biotech Values

[DewDiligence]

PFE—Today’s Barron’s has a short piece with the right Rx for boosting the share price materially. How? Financial engineering and, especially, leveraging the balance sheet more aggressively:

http://online.barrons.com/article/SB50001424052970204650204576003802213136870.html

Pfizer might spin off or sell some higher-value businesses, including animal health, consumer health and infant nutritionals. These businesses command a premium valuation of at least 15 times earnings, about double Pfizer's current P/E. By selling or splitting them off, Pfizer could retire a significant number of shares. These divisions could be valued at $27 billion, or some 20% of Pfizer's market value of $135 billion.

…The company generates about $20 billion in annual cash from operations, and sets aside $13 billion for dividends, capital expenditures and debt reduction… Pfizer has begun buying back stock following a hiatus after its $68 billion purchase of Wyeth in 2009, but the purchases have been modest so far, at $1 billion in 2010.

A more aggressive buyback of $5 billion to $6 billion annually in the next five years could lift the company's profit to more than $2.60 a share by 2015… An even bigger buyback program of $8 billion to $9 billion annually could lift profit to almost $2.90 a share by 2015.

Even if the P/E were to remain somewhat depressed, a sustainable annual EPS of $2.90 would justify a much higher share price than where PFE is trading today.

The whole point of the WYE acquisition—which many observers missed—was to boost EPS by leveraging the balance sheet. There is more work to be done in this regard, IMO, and the new BoD may be more inclined to do it.