Pfizer’s Mega-Merger Is NOT a Sign of Strength

Pfizer’s (NYSE: PFE) acquisition of Ireland-based Allergan (NYSE: AGN) is the biggest mergers and acquisitions (M&A) deal in the history of the health care sector.

And with a price tag of around $160 billion, it would be reasonable to assume that Pfizer’s latest acquisition is a showing of its strength and vigor.

But this chart suggests otherwise. Take a look…

Pfizer Stock Price Versus S&P 500 Health Care and Pharmaceuticals
In reality, Pfizer’s stock has lagged the S&P 500 (SPY)… which has itself lagged the health care (XLV) sector… which has lagged the astronomical gains made by the pharmaceutical (XPH) sector.

I don’t know about you… but I find it odd that an industry laggard is making the biggest M&A deal in health care history.

Of course, the company’s executives are putting a positive spin on the merger (as they always do). They’re promising health care consumers cheaper drugs, and investors better returns… all thanks to this deal.

But after looking at the deteriorating trends in Pfizer’s fundamentals, I can’t help but see its merger with Allergan as a last-ditch attempt to grow – and to grow at any cost ­­– now that the reality of slowing global growth is sinking in.

Get this…

Pfizer’s revenue is down 24% from four years ago.

Its operating profit margin is down 35% from two years ago.

Earnings-per-share (EPS) is down 83% from its June 2013 peak.

Meanwhile, the company’s total liabilities are now nearly double what they were in 2008.

And shares – with a price-to-earnings ratio (P/E) of 23 – are now three-times as expensive as they were just two years ago.

These are clearly not good trends. In fact, they’re downright horrible.

Yet somehow, Pfizer’s merger with Allergan is expected to turn this all around… making the “new” Pfizer a prodigy of the up-and-coming “growth pharma” business model, where bigger is better.

I have my doubts… which I’ll discuss in more detail later this week.

For now, I recommend steering clear of these mega-merger players. Pfizer’s is just the latest, but there’s a lot more of them.

Adam O’Dell, CMT

Chief Investment Strategist, Dent Research

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Categories: Health Care

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.