But Pfizer Inc. (NYSE:PFE) will have to deal with some alarming drops in its most important units’ revenue: primary care (20% drop), specialty care (6%) and established products (15%). The company will also have to face another problem as the European patent of one of its leading drugs, Viagra, expired. That drug generated more than $2 billion in revenue for 2012.
Pfizer Inc. (NYSE:PFE) has benefited from the Zoetis’ IPO in which the company had a 19.8% interest and saw $6 billion in proceeds. Although Pfizer’s stock price declined after the IPO, it has gained more than 23% from June to the present date. However, it is expected that Pfizer will spin off its remaining ~80% interest in Zoetis, which could impact short term EPS and be accretive post 2014. Investors should acquire Pfizer shares only if they have a long-term horizon.
Merck & Co., Inc. (NYSE:MRK): Suffering from the patent cliff
Merck & Co., Inc. (NYSE:MRK) produces prescription medicines, vaccines, biologic therapies, and consumer care and animal health products. It is present in 140 countries. The company is having revenue problems amid the patent cliff affecting most of the pharmaceutical companies: as Mr. Kenneth Frazier, chairman and CEO, stated “Our first quarter performance reflects the challenges of major patent expiries coupled with the impact of currency and other headwinds.”
Merck & Co., Inc. (NYSE:MRK) lost market exclusivity of several drugs: Singulair, Maxalt and Clarinex. This is a huge problem as the pharmaceutical segment accounts for more than 83% of total sales. Merck & Co., Inc. (NYSE:MRK) has posted a sales figure of $10.7 billion for the first quarter of 2013, a 9% decline compared to the same quarter in 2012 and a 24% decrease in net income totaling $992 million for the same period of comparison.
Although the company’s stock has not suffered major setbacks as it gained 16.2% in the past year, Merck & Co., Inc. (NYSE:MRK) has a lot of problems ahead to solve. One solution for Merck & Co., Inc. (NYSE:MRK)’s growth forecast could be growing by acquiring another smaller player. The company already estimates $5 billion to be used in acquisition related costs for 2013.
Final comment
Abbott Laboratories (NYSE:ABT) presents a very good opportunity to get more exposure to the pharmaceutical business because although it has the lowest P/E of the peer group at 17.3, it also has the lowest PEG ratio at .9 (all of the three companies have similar dividend yields around 3.3% to 3.7%) which could indicate the stock is undervalued; compared to a higher PEG ratio for Pfizer at 3.9 and Merck’s higher PE of 24.1.
Moreover, Abbott has the greatest return on equity at 21.9% and the biggest return on assets,10%, of this group. Pfizer is a long-term investment as the possible Zoetis divestment will be accretive post 2014 and current results are not encouraging. Merck, on the other hand, is the most overvalued company in the peer group, and appears to be the least attractive option.
Fernando Domenici has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Fernando is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article How Will the Patent Cliff Affect These Pharmaceuticals? originally appeared on Fool.com is written by Fernando Domenici.
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