Will Pfizer Take a Beating After Its Celebrex Settlement?

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On August 2, 2016, Pfizer Inc. PFE announced that it had reached a $486 million settlement in a ten-year-old lawsuit involving two of its drugs, Celebrex and Bextra. The lawsuit involved investors who say the company misled them about safety risks involved with the medications.

The settlement covers shareholders who bought Pfizer stock between October 31, 2000 and October 19, 2005. Pfizer had previously paid out $2.3 billion in 2009 to settle claims from the U.S. government regarding the marketing of the drugs.

“This resolution reflects a desire by the company to avoid the distraction of continued litigation and focus on the needs of patients and prescribers,” the company said in a statement. Neha Wadhwa, spokesperson for Pfizer, stated that the company did not admit any wrongdoing in conjunction with the settlement.

Between August 1-8, 2016, Pfizer lost $2.38 per share. It has since hovered around $35 per share. That begs the question if the stock will fall lower as a result of the settlement, or if investors were already prepared for it and have absorbed it into the current stock price.

Pfizer has lost less than 5% since the settlement announcement. The largest movement was in the first two days and has since levelled out.

According to most analysts, the majority of investors dump their shares prior to any verdict or settlement. This means that the stock price would be affected prior to the end of the lawsuit.

“The filing of the class action may not affect a company's stock price,” says trial attorney Lawrence J. Buckfire, founder of DrugLawsuitSource.com. “However, a large verdict on a case where there are thousands of claims lined up for suit or trial, may cause some investors to unload their stock before the company's valuation is lowered.” 

So is the case with Pfizer. According to its trading history, the company lost $70 billion in market value in October 2004, the day after the class period ended. Investors dumped their shares at that time, long before any agreement or verdict was reached.

A 2009 study by Harvard would confirm that contingent liability is factored into the share price at the beginning of a lawsuit. “We find that investors partially anticipate lawsuits based on firm-specific and industry-specific information and capitalize losses prior to the filing of a lawsuit.”

Pharma is also not a stranger to lawsuits. Pfizer has settled dozens of class action lawsuits over the years, just as other pharma companies have. Many investors take this into account and no longer consider it a major factor when researching a potential investment.

So what does this all mean for Pfizer? Based on the recent stock price movement, there only seems to be a minor negative reaction to the settlement. There also appears to be a correction when the lawsuit was filed, showing that investors have taken a potential settlement into account.

Currently, Zacks analysis shows that eight firms rate Pfizer as a Strong Buy while six rate it as a Hold.

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Posted In: BiotechTrading IdeasGeneral
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