Pfizer jointly developed a two-dose mRNA-based vaccine to protect against the SARS-CoV-2, the virus that causes COVID-19 with its Germany based partner BioNtech (BNTX, Financial) in less than a year with a 90% efficacy. The vaccine was the first to receive the emergency use authorization in any developed country in December 2020, first in the U.K., then in the U.S. This was very closely followed by a similar vaccine from Moderna (MRNA, Financial). These two mRNA vaccines completely changed the trajectory of the global epidemic resulting in confidence returning to the world population which was discouraged, beaten and cowed down by the pandemic. I don't think its hyperbole to say that Pfizer, BioNtech and Moderna helped to save the world.
However Pfizer's success in Covid Vaccines and drugs has not been accompanied by sustained stock price gains. The company stock which gained initially has fallen in disfavour as its sales of Covid drugs have fallen. Investors seem oblivious to the fact that Covid drugs sales have fallen because of the extraordinary success of these products and these products are not needed as much as the disease has been beaten and risk greatly reduced on a population level. Public funding for Covid prevention has been drastically reduced and has dried up. However Pfizer has been wisely investing its Covid Cash bonanza in developing a deep and sustainable pipeline which will pay off in spades in the medium to long term. The stock in my opinion is very under-valued.
The Pfizer Pipeline
Pfizer has been flush with cash following the massive success of its Covid-19 vaccine and medication. With the Covid cash bonanza, the company has been making big acquisitions. Pfizer acquired Trillium Therapeutics a development stage immuno-oncology company in 2021. Pfizer expects to benefit from the Canada-based Trillium's blood-cancer therapies which are under development that target a "don't kill me" signal used by cancer cells to evade the bodys immune system.
More recently Pfizer has agreed to acquire Seagen in March 2023 for $43 billion. Seagen is an industry leader in antibody drug conjugate (ADC) research and, in the use of this technology, the treatment of cancer. ADCs are medicines designed to harness the targeting power of antibodies to deliver small molecule anti-cancer drugs to the site of the tumor. Seagen is commercializing Adcetris for the treatment of several types of CD30-expressing lymphomas, Padcev for the treatment of locally advanced or metastatic urothelial cancer, Tukysa for the treatment of certain HER2-positive metastatic breast cancers and Tivdak for recurrent or metastatic cervical cancer. Beyond the four products in its commercial portfolio, Seagen itself has a healthy pipeline, which could further contribute to Pfizer in the years ahead.
Pfizer had separated its off-patent drug, Upjohn business in 2020 by merging it with generic manufacturer Mylan and spinning off the combined business as Viatris, (VTRS) as a separate company. Pfizer had earlier separated its Over the Counter drug business (combining that with GSK's business and separating it as Haleon (HLN)) and its animal health business (Zoetis (ZTS)) and is now a focused pure play R&D based human therapeutic growth business. Its focused on high margin innovative patent protected pharmaceuticals, vaccines and biologics.
The following chart show's Pfizer's performance (green line) as compared to the S&P 500 (blue line) since the start of the pandemic in February 2020. Incredibly Pfizer's stock is now below where it was at the start of the pandemic and about the same level at the depth of the March 2020 bear market. This to me, is absurd given the amount of cash Pfizer has banked from its Covid treatments (which I estimate to be about $40 billion) and all the great pipeline assets Pfizer has bought with this incremental cash like the Seagen and Trillium assets as well as advancements of its own pipeline. The market is too focused on near term growth declines than looking at medium and long term view of Pfizer's business.
The following chart shows Pfizer's free cash flow over the last 4 years in billion dollars. While Pfizer's free cash flow will certainly go down in the coming years as Covid recedes, Pfizer has used the cash to make some great acquisitions which will pay dividends to investors for years in the future. Free cash is important because is the cash left over after paying all expenses and can be used by the company to pay down debt, pay dividends, buy back stock, and facilitate further growth of the business.
The market is giving little credit to Pfizer's acquisition of Canada based Trillium and Seagen bought with Covid cash as well as its vast development pipeline which currently has over 80 projects in development, including some block-busters like a mRNA based influenza vaccine and a oral GLP-1 diabetes/obesity drug (danuglipron) which is currently in Phase 2 with data expected year end. Pfizer has also now launched at new Respiratory syncytial virus (RSV) vaccine (Abrysvo) which is expected to ramp up to sales of $2 billion per year.
While Pfizer will lose patent exclusivity for many products in the coming years, which is par for the course in the life of big pharma, Pfizer's huge R&D machine and astute acquisitions are more than expected to make up for such patent losses. While a detailed discussion of Pfizer's pipeline is far beyond the scope of this article (and frankly beyond the scope of understanding of most investors without deep biomedical expertise) interested readers can peruse Pfizer's pipeline by following this link.
Valuation
The following chart compares Pfizer's stock price to median price to earnings (PE), median price to operating cash flows and median price to sales (PS), justified prices over the last 15 years, a period which encompasses two business cycles and two recessions as well as the Covid boom and bust. By examine the chart below, I conclude that Pfizer is undervalued and should likely have a fair value of between $35 and $40 a share.
Overall Gurufocus algorithms, which I find credible and understated in this case, shows Pfizer to "modestly undervalued" with strong growth and profitability metrics and good financial strength. It is obviously lacking in price momentum, which represents an opportunity for long term investors who can ignore short term market gyrations.
Forward Rate of Return
Forward Rate of Return is a concept that Guru investor, Don Yacktman uses in his investment approach. Yacktman explained the forward rate of return concept in detail in his interview with GuruFocus, as the normalized free cash flow yield plus real growth plus inflation. EBITDA (Earnings Before interest, tax and depreciation) per share growth rate can be used as proxy for real growth rate + inflation (nominal growth rate). Normally 5 year EBITDA growth rate is used by Gurufocus in its calculations but since Pfizer's 5 - years EBITDA growth rate was boosted by the pandemic, and is unlikely to repeat itself, I am adjusting the calculations by taking a 10 year EBITDA per share growth rate (which is 5.9% per year on a compounded basis).
I estimate Pfizer's Forward Rate of Return (Yacktman) as :
| Forward Rate of Return | = | (Normalized Free Cash Flow) | / | Price | + | (10-Year EBITDA Growth Rate) |
| = | 2.92819048 | / | 29.92 | + | 0.059 | |
| = | 15.68 % |
This means going by Yacktman methodology we can expect Pfizer's stock to deliver a total return (incl. Dividends) of 15.68% annually over the medium term (3 to 7 years).
Dividend
The above valuation should be taken in considering Pfizer's superb dividend yield which is currently at 5.48% and which as grown by 4.6% over the last 5 years. This means if the dividend continues to grow at the present rate we can expect a 6.86% in 5-years time on our current cost basis.
Risks
The first round of top10 top prescription drugs subject to negotiations with Medicare was announced by the Centers for Medicare & Medicaid Services (CMS) on August 29, 2023. Eliquis, used to treat Atrial fibrillation which was jointly developed and commercialized by Bristol Myers Squibb and Pfizer is on the list. Last year Medicare Part D spending on Eliquis was at $16.5 billion. Eliquis' patent protection is expected to last until 2028. Xtandi, the key drug to treat prostate cancer, jointly commercialized by Pfizer and Astellas, could be included in the next rounds of negotiations, with CMS. The 2024 US election season is also a risk to investor sentiment as big pharma is a favorite political football for politicians who tend to rail against high drug prices in order to get elected and promptly forget about it after getting elected.
Conclusion
Pfizer leverages an array of drugs to enhance its overall portfolio, and recent acquisitions have further fueled its growth. These acquisitions were funded by the substantial profits derived from the extensive sales of its Covid-19 vaccines and medications. Unlike many other brand drug developers that heavily rely on a few key brands, Pfizer's revenue breath is more diversified. However, the company is not immune to common risks inherent in the pharmaceutical industry, including the challenges associated with expensive and uncertain clinical trials, regulatory obstacles, and the persistent threat of generic or biosimilar manufacturers vigorously contesting brand patent validity in court, often sooner than anticipated. Though Pfizer now with a strong array of Vaccines (following its merger with Wyeth several years ago) is more immune against generic competition due to the manufacturing complexities of vaccines (vs. Small molecules). Pfizer is also on the cusp of introducing more and more biologics which are also difficult to genericize.
The implications of Messenger RNA (mRNA) technology platform itself are vast. Several vaccine developers including Pfizer are studying this technology for deployment against rabies, influenza, Zika, HIV and cancer, as well as for veterinary purposes. Its potential utility is based upon its being a “platform technology” that can be developed and scaled rapidly. Given that only the genetic code for a protein of interest is needed, synthetically produced mRNA vaccines can be made rapidly (in vitro), in days instead of months, like other vaccine approaches involve growing and/or producing proteins in cells (in vivo), . Messenger RNA vaccines are generally regarded as safe, since they do not integrate into our cells DNA and naturally degrade in the body after injection.
Pfizer's sheer size establishes one of the most substantial economies of scale in the pharmaceutical sector. In an industry where achieving success in drug development often requires multiple shots at the goal, Pfizer possesses the financial capacity and well-established research capabilities to facilitate the creation of a greater number of new drugs. In this respect, big pharma like Pfizer have become more like movie studio's like Netflix, Disney or HBO who produce dozens of movies a year not knowing which one will become a blockbuster and pay for many failures and mediocrities. Furthermore, following years of challenges in introducing significant new drugs, and after having shed peripheral divisions such as OTC, Animal Health and Upjohn, a focused Pfizer is currently unveiling several potential blockbuster medications in the fields of cancer and immunology.
Backed by extensive financial resources, Pfizer sustains a top-tier sales and support team many with advanced biomedical training and qualificatons, which is very difficult to replicate. The company's dedication to post-approval studies equips its sales team with a wealth of data and new claims to bolster their marketing initiatives. Additionally, Pfizer's dominant salesforces in emerging markets strategically position the company to capitalize on the escalating prosperity in countries like Brazil, India, and China.
