| NEW YORK
NEW YORK Pfizer Inc, long in the doghouse with frustrated investors, is winning attention from some of the savviest hedge funds thanks to high-tech drugs and vaccines that it got when it paid $68 billion for Wyeth.
Revenue from Wyeth's lucrative biotech products could offset much of the long-expected plunge in sales of Pfizer's (PFE.N) $12 billion-a-year Lipitor cholesterol pill, which faces generic competition late next year.
While it may take years for these potential new hits to reach the market, early test results could give the stock a boost over the next 18 months, analysts and investors said.
Considered cheap, high yielding and unloved on Wall Street for most of the last decade, shares of the world's largest drugmaker have gone nowhere. Trading at almost $50 a share in 2000, the stock sits at $17.55 today.
But the Wyeth acquisition, which closed in October, has grabbed the attention of hedge fund stars including John Paulson, Christopher Shumway, David Einhorn and Michael Karsch. They were among 11 of the 30 largest equity-oriented hedge funds buying shares of Pfizer in the fourth quarter, according to a Thomson Reuters analysis of recent securities filings.
Including several funds that bought stakes earlier, 14 out of 30 funds in the group owned the stock at the end of the quarter, making Pfizer one of the most popular companies with the smart money set. The total $1.8 billion worth of shares owned places the company as the 13th biggest bet in the group's combined equity portfolio.
The investments represent a big bet on Pfizer Chief Executive Jeffrey Kindler, the company's former general counsel. A Washington lawyer who worked for McDonald's and General Electric, Kindler has not had much good news since taking over the top job in 2006.
It is also a bet on the future of the Pfizer-Wyeth drug pipeline, investors said.
"They're not going to really grow earnings much over the next couple of years because of patent expirations," including on Wyeth's blockbuster Effexor treatment for depression, said Russell Croft, portfolio manager of Baltimore-based asset manager Croft-Leominster.
Croft, a longtime holder of Pfizer who is adding to his stake, said the drugmaker is a standout in terms of value, but it requires patience.
"We're looking for good results from late-stage trials of new drugs and for earnings growth to kick in in 2013 and 2014," Croft said.
TRIALS AND TESTS
Pfizer's experimental drugs include treatments for Alzheimer's disease, cancer, pain and diabetes. Six vaccines and 27 biotech drugs -- complex injectable proteins that target other proteins linked to diseases -- are being tested. That's up from one vaccine and 16 biologics before the Wyeth merger.
While most of the drugs are years away from bringing in revenue to boost the bottom line, results from a half dozen trials and tests due in 2010 and 2011 could get the stock moving, according to a report by analysts at Credit Suisse.
Just last week, the Food and Drug Administration approved Pfizer's Prevnar 13 vaccine for use on infants. Results from advanced Phase III trials on adults may come later this year.
Still, Pfizer needs to clear numerous other hurdles to reverse its fortunes, following years of declining sales and earnings, and a decade-long failure to produce big drugs despite industry-topping research budgets.
Shares trade at 8.1 times Pfizer's expected 2010 per-share earnings, a 20 percent discount to the American Stock Exchange ARCA Pharmaceutical Index .DRG of large drugmakers -- illustrating worries that the drugmaker is not up to the task.
In the meantime, Pfizer's dividend, with an annual yield of 4 percent, is placating many investors as they envision a return of the double-digit annual earnings growth that ended after Pfizer used up huge cost savings from earlier acquisitions of U.S. rivals Warner-Lambert and Pharmacia.
Pfizer's concerted push into China and other emerging markets with its branded and generic drugs is also luring investors, according to Bill Smead, portfolio manager of the Smead Value Fund. With growing prosperity, many patients are already paying out of pocket for the Pfizer name rather than risk taking less-costly alternatives.
Even so, Smead said most large drugmakers are undervalued and he has even greater enthusiasm for Amgen Inc (AMGN.O) and Merck & Co (MRK.N) -- which many analysts think now has the industry's best drug pipeline thanks to its recent purchase of Schering-Plough Corp.
Peter Jankovskis, co-chief investment officer of OakBrook Investments, said Pfizer shares are attractive, but cautioned that they are far from a sure thing.
"There's still a lot of risk, including potential health care legislation that has held back the whole pharmaceutical sector," Jankovskis said.
The pharmaceutical industry had cut a deal with the Obama administration to limit its pain in the overhaul. But with reform legislation in a state of limbo, no one can be sure the deal will hold.
Another problem could arise if Pfizer's returns from its emerging market spending binge badly trail its margins in the lucrative U.S. market.
"The company has to invest wisely, and it's difficult to sort that out from the outside," he said.
It is a bet that the smart money seems willing to take.
(Reporting by Ransdell Pierson. Editing by Robert MacMillan)