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Pfizer Plan to Buy Stock, Raise Dividends Overshadows Growth Strategy


Stock buybacks and dividend increases are nice gestures to shareholders, but what about growth?

Despite all the talk about divestitures, stock buybacks, and higher dividends, there's still much interest in how Pfizer (PFE) is going to replace the loss of Lipitor sales to generic competition.

After reporting a 19% decline in quarterly net income, CEO Ian Read made it clear on a call with Wall Street analysts Tuesday that the company's cash is best spent on share buybacks and dividends. He's said this before and he reiterated that any acquisition would have to be very compelling -- a "high hurdle" -- to trump a plan to repurchase the company's own stock. This raises an important question as Pfizer expects to receive almost $12 billion for the sale of its baby food business to Nestle sometime in the first half of next year.

Is Pfizer being too conservative? Its shares are up 6% this year but that's off a low base. The stock is less than half what it traded at a little more than a decade ago when Lipitor was on its way to becoming the world's biggest-selling drug. Shares traded at $22.96 midday Tuesday.

Waving off deal talk, Read isn't even discussing major acquisitions. He says at this point he doesn't see any small takeovers that compel him to spend money. So that brings us to Pfizer's pipeline of developmental products. And the spotlight -- at least near term -- is on an experimental pill to treat rheumatoid arthritis, tofacitinib.

At the foundation of his overall strategy, Read is completing a task dictated by Wall Street: Become smaller through divestitures and cost cutting to focus on a core business, which is drugs (branded and generic). The company continues to divest; Pfizer plans to divest (probably through a spin-off) its animal drug business sometime in the next year.

Yet Read and other Pfizer execs faced recurring questions today over tofacitinib, an oral drug to compete with injected therapies such as Abbott Laboratories' (ABT) Humira, Johnson & Johnson's (JNJ) Remicade and Amgen's (AMGN) Enbrel. The primary question is whether the folks at Pfizer think their drug will be approved. On May 9, the medicine faces a review by a panel of government advisers who help steer the Food and Drug Administration in its decision on a possible market approval.

While they predict a "thorough and robust discussion" among the FDA advisers, the Pfizer execs say they have a good case for winning market clearance. An oral medicine would be a breakthrough product for a debilitating disease and the drug has shown to be effective in studies. Side effects will be weighed, however, as safety issues are a major concern for any FDA approval.

ISI Group analyst Mark Schoenebaum predicts a "tough" advisory committee for Pfizer next week because of the safety concerns. (It should be noted that approved drugs such as Humira also have side effects). Pfizer likely would face a post-approval safety study, a risk-mitigation plan for patients, and label warnings, Schoenebaum says in a recent note.

However, while he views Wall Street expectations as "modest" for tofacitinib, Schoenebaum predicts it will get the green light and he estimates peak sales of $3 billion for the drug by 2019. (Pfizer reported first-quarter drug sales of about $13 billion, an 8% decline from a year earlier.)

Tofacitinib would help reverse the trend of declining sales. There are, of course, other upcoming catalysts for Pfizer. The FDA delayed a decision on Eliquis, a blood-thinning drug developed with Bristol-Myers Squibb (BMY) until June 28. The product is potentially a big seller, though profit is shared.

At the very least, tofacitinib becomes a symbol of whether Pfizer can get back on track bringing blockbuster drugs to market. At some point, Read is going to exhaust a strategy of buybacks and sales of businesses.

Twitter: @brettchase

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