Pfizer: Blockbuster success is a double-edged sword

I wrote this article for FT in 2005, but after reading news on Pfizer it feels like I could have written it today.

Here are some excerpts from the article:

  1. Blockbuster success is a double-edged sword. In this litigious society a discovery of side-effects brings an army of tort lawyers to the doorsteps of pharmaceutical companies.
  2. The demographic trends of ageing baby boomers will push demand for the pharmaceuticals into the stratosphere for a long time. However, investors should add another dimension to their analysis – product diversification.  Companies that have a high concentration of sales in just a few blockbuster drugs should either be avoided or have a much smaller place in the portfolio. Also, investors should temper valuation premium expectations for the overall sector as it is unlikely to return to its old levels.
  3. Medical device/instrument companies are likely to take over the leadership from pharmaceutical companies and inherit the premium valuation.  [Zimmer (ZMH), Biomet (BMET) come to mind here].  They will reap the rewards from the baby boomers’ desire for longer and healthier lives. With few exceptions, medical device/instruments companies have a much more diversified product line.
  4. Companies that provide services to the pharmaceutical industry are a good sidedoor to participate in the industry’s future prosperity without subjecting investors to the all risks. IMS Health (RX), a provider of market intelligence to the pharmaceutical industry, comes to mind as a good side position. It has all the qualities of a pharmaceutical company: strong competitive advantage, terrific return on capital, monopoly-like profit margins, great cash flows, very reasonable valuation and good consistent growth prospects ahead, without all the aforementioned risks. [I no longer own RX, but it maybe a good time revisit the stock.]

Position in ZMH

Vitaliy Katsenelson

I am the CEO at IMA, which is anything but your average investment firm. (Why? Get our company brochure here, or simply visit our website).

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.”

I’ve written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (I’m working on a third - you can read a chapter from it, titled “The 6 Commandments of Value Investing” here).

And if you prefer listening, audio versions of my articles are published weekly at investor.fm.

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