I thought I was finished with the post-Pfizer analyst meeting reaction with yesterday's post, but when an extraordinarily bearish 77-page research note from Credit Suisse big pharma analyst Catherine Arnold arrived in my inbox this morning, I had to do one more installment.
In the note, Arnold names names. She thinks Pfizer should buy Wyeth or Amgen . Quite some time ago, Deutsche Bank analyst Barbara Ryan had suggested Pfizer look at Amgen as well.
Arnold claims Pfizer has four choices:
1. Go it alone.
2. Do a big deal.
3. Do a bunch of small deals.
4. "Divest, or even become an acquisition target." (I put the fourth choice in quotes to make clear it's a direct quote from Arnold's note.)
Arnold argues that a big deal offers the clearest path toward a higher share price. By Arnold's calculation, "PFE value is $29 with a Wyeth deal (and average synergies) and $26 with Amgen." She says a Wyeth deal would add to earnings in the first year and an Amgen deal would boost profit in the second or third year.
The word she uses is "accretive," but I don't like that Wall Street word or the opposite one, "dilutive." In plain English, a deal adds to or subtracts from earnings. Arnold also names six other biotechs and eight "specialty pharmaceutical" companies that passed her team's screening process as potential PFE targets: Biogen Idec , Celgene , Cubist , Genzyme , Gilead Sciences , United Therapeutics , Allergan , Cephalon , Endo Pharmaceuticals , Forest Laboratories , Medicines Co. , Sciele Pharma , Sepracor and Shire Pharmaceuticals .
If PFE doesn't make a big buy, Arnold believes the attractive dividend is at risk. At the analyst meeting, Pfizer's CFO said, "Barring a significant unforeseen event of size," the dividend can be maintained "at least at current levels."
But Arnold says, "Assuming historical levels of dividend increases (10 percent annually), PFE's free cash flow will fall to less than the dividend by 2013. This calls into question the sustainability of PFE's dividend (and dividend increases) and therefore of the stock price which it underpins."
At the meeting the CEO and CFO asserted that while they remain "open to everything," they just don't see a big acquisition that makes sense.
In her exclusive interview with Pfizer Chairman and CEO Jeff Kindler Wednesday, Maria Bartiromo asked him specifically about the idea of buying Amgen and generally about doing a "megamerger." You can watch the segments by clicking on these videos.
Credit Suisse makes a market in PFE and wants to do investment banking for the company. Separately, a Pfizer spokesman points out that the disclosures provided by Goldman Sachs, which I cited in yesterday's post, are outdated. A GS director is no longer on the Pfizer board.
Catherine Arnold is maintaining a neutral rating on PFE, but in today's note it sounds as if she's telling clients to sell it. "Pfizer shares are worth $21 in the current 'go it alone' scenario. Our price target is reduced from $26. We advocate avoiding shares of Pfizer," she writes.
Pfizer shares hit a new intra-day low this morning of $21.28 as of this writing.
Questions? Comments? Pharma@cnbc.com