On May 22nd, we had forecasted a bullish reversal in the stock of US pharmaceutical company Pfizer Inc (NYSE: PFE), on the basis of an increase in the fiscal 2017 first-quarter earnings amidst tough business conditions. Furthermore, the report also informed our desire to invest in a call option. The stock was trading at about $31.80. On June 1st, the stock closed above $32.50 and the option expired in the money. Now, the stock, which closed at $33.35 on Friday, is expired to decline due to reasons mentioned below.
In 2010, Pfizer invested $240 million to receive a 40% stake in Brazilian generic drug manufacturer Laboratório Teuto Brasileiro. However, the venture failed to live up to expectations. Last week, the company relinquished its stake back to the heirs of the Brazilian company for a token payment of 1 Real ($0.30 per share).
The stake was written off after Pfizer attempted to find a suitable buyer for almost a year. Pfizer and Teuto had even appointed Goldman Sachs Group and Grupo BTG Pactual to scout for a buyer. Initially, there were reports that generics giant Teva is interested to buy the stake, but it never materialised. The historic recession has dampened the demand for drugs in Brazil and that created a disagreement between Pfizer and Teuto about the manner in which the business challenges should be handled.
Pfizer’s problem does not end with that. Analysts point out that the company has too much exposure to Medicare Part D for oncology and that could be affected in a case the US government starts spending less. Additionally, the US public does not have a good opinion about the drug pricing practices of pharma companies and the President himself has vowed to bring the costs down. Finally, when Trump took charge as the President of the US, the pharma companies were hoping for a speedy tax reform that would allow them to repatriate billions of dollars stashed overseas and use it for the much needed acquisitions. However, the delays have put Pfizer and other pharma companies in a difficult position. On the basis of the above discussed facts, Andrew Baum, an analyst at Citigroup, trimmed the earnings estimates by between 5% and 10% for the 2018-2022 period. Furthermore, the analyst also downgraded the stock from “neutral” to “sell” rating, with a price target of $31. In his report, Baum has underlined the need for Pfizer to have a big deal to achieve the earnings forecasts. Thus, as of now, fundamentally, the stock is expected to remain range bound with bearish bias.
A put option is what we prefer at this point in time, to gain from the forecasted downtrend. The strike price should be preferably around $33.5 and the contract expiry date should be around July 18th.
Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.