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Pfizer: Why It's An Easy High Conviction Buy
Apr. 06, 2021 8:44 AM ETPfizer Inc. (PFE)35 Comments65 Likes
Summary
Pfizer projects approximately $15 to $20 billion in 2021 revenue from the vaccine.
Investors appear to view the spike in vaccine revenue as a one-time event.
However, there are reasons to believe vaccine revenues could continue.
Even without the vaccine, Pfizer has a solid growth profile.
Covid-19 Coronavirus Vaccine vials in a row macro close up
Photo by MarsBars/E+ via Getty Images
Pfizer's (PFE) revenue fell from $51.75 billion in 2019 to $41.9 billion in 2020.
Considering those numbers, perhaps you are wondering why the title of this article touts the stock as a buy. The drop in revenues recorded last fiscal year are the result of a transformation that is largely completed. Along with other moves, management divested the company of slow growers in its portfolio. Furthermore, that isn't the only development that leads me to recommend the stock.
Most investors are aware Pfizer's vaccine was the first approved by US regulators. That vaccine could drive the firm's profits substantially higher. However, even if that scenario does not unfold in the company's favor, there are ample reasons to believe Pfizer's sales and profits will grow, driving the shares higher.
Add in the current valuation and robust yield, and I believe this stock is an attractive investment.
The Transformation Of Pfizer
In November of last year, Pfizer completed a spin off of its off-patent drug division, Upjohn, which combined with Mylan to form a new entity named Viatris (VTRS). With a portfolio including Viagra, Lipitor, Chantix, Lyrica and Celebrex, Upjohn represented nearly 15% of total revenues. However, that segment's sales had declined 30% in the first nine months of 2020 alone. Chronically falling sales had reduced Upjohn's share of the company's revenue from 26% in 2017 to 20% in 2019.
The completion of that deal resulted in revenue from Upjohn being erased from Pfizer's books. Therein, lies the cause of the revenue decline I listed in the onset of this article.
Adjusted for the spin off, Pfizer had a 2% revenue increase in YoY. Pfizer also received $12 billion from Viatris following the spin off.
In the middle of last year, GlaxoSmithKline (GSK) and Pfizer combined their consumer healthcare businesses into a joint venture that is now the largest provider of non-prescription drugs. That business is controlled by GSK and operates as GSK Consumer Healthcare.
By ridding the company of drugs that have lost exclusivity, management can concentrate on developing and commercializing new, innovative drugs. There is some evidence that strategy is bearing fruit.
Since 2015, the firm's Phase 2 success rate increased from 15% to 52%, nearly double the industry average of 29%. The phase 3 success rate improved from 70% to 85%. The all important end-to-end success rate was boosted more than fourfold, from 5% to 21%, triple that of the industry average.
The Phase 1 success rate of 48% remained flat, but that beats the industry average of 40% by a wide margin. Perhaps these metrics explain how Pfizer became the first company with a COVID vaccine approved by
What We Need To Know About Pfizer's Vaccine
A month ago, Pfizer forecast sales of the vaccine, sold under the brand name Comirnaty, would generate $15 billion in sales in 2021. That was before increased orders from the EU and US rolled in. Sales this year are now expected to reach at least $20 billion.
When the vaccine first rolled out, I was taken aback by the ultra-low temperatures required to transport and store the drug. I assumed that once an effective alternative became available, Comirnaty would fall by the wayside. However, in late February, the Food and Drug Administration announced vials of Comirnaty could be transported and stored at conventional temperatures.
In late March, the European Medicines Agency approved storage of Comirnaty at temperatures of -25 degrees to -15 degrees Centigrade for up to two weeks.
Less than a week ago, the Wall Street Journal reported Pfizer is testing a freeze-dried version of Comirnaty. Referred to as a lyophilized formulation, the vaccine could be stored in standard refrigeration. Should those efforts prove successful, it would provide safe and effective means to provide the vaccine in the rural US and within low income countries.
Aside from the good news regarding storage requirements, a plethora of positive data indicates Comirnaty has a high degree of efficacy as well as an outstanding safety profile.
Less than a month ago, the Israel Ministry of Health (MoH) announced the results of studies reporting dramatically lower incident rates for those fully vaccinated with Comirnaty. MoH reported unvaccinated subjects were 44 times more likely to develop symptomatic coronavirus and 29 times more likely to die once infected.
The data determined the Pfizer vaccine was 97% effective in preventing symptomatic disease, severe/critical disease and death. Meanwhile, an Oxford University study indicates one dose of the vaccine is 90% effective in preventing the disease.
A study published in the New England Journal of Medicine states Pfizer's vaccine is effective in neutralizing a variant of the virus spreading in Brazil, while previous studies showed Comirnaty works well combatting variants found in the U.K. and South Africa.
Meanwhile, a study released late last month by the American Journal of Obstetrics & Gynecology proved the Pfizer vaccine is safe for pregnant women.
A few days ago, Pfizer released the results of a Phase 3 trial showing the vaccine is 100% effective for children aged 12 to 15.
In the latest quarterly report, management quoted referenced research indicating a .25% serious adverse events rate for those administered the vaccine.
All of this indicates Pfizer's vaccine is safe, that it has a high efficacy rate among a variety of demographics, and that its administration results in a very low rate of serious adverse events.
However, there is something close to a literal gold lining for investors in other data regarding Comirnaty. Research from the New England Journal of Medicine indicates antibody levels plummet in the three months following infection, and should that phenomenon continue, antibodies would disappear in a year.
Research from Spain indicates the immune response may be lost in three to five weeks in some patients. Meanwhile, officials in the U.K. have stated an annual booster shot is probable.
An annual booster shot would also serve to boost Pfizer's revenue stream from Comirnaty in more ways than one. Obviously, annual shots would provide enduring sales for the foreseeable future, but there is much more to consider. The company currently provides pandemic pricing for the vaccine.
Pfizer forecasts $15 billion in vaccine revenue in 2021, generating over $4 billion in adjusted income. Considering the firm recorded $12.5 billion in adjusted income in 2020, that's a robust increase.
Now read the commentary provided in the last quarterly report.
So, the one price that we published is the price with the U.S. of $19.50 per dose. Obviously, that's not a normal price, like we typically get for a vaccine, $150, $175 per dose...Now, let's go beyond a pandemic pricing environment, the environment we're currently in. Obviously, we're going to get more on price. And clearly, to your point, the more volume we put through our factories, the lower unit cost will become. So, clearly, there is a significant opportunity for those margins to improve, once we get beyond the pandemic environment that we're in.
-Frank D'Amelio, CFO
Management Forecasts And Growth Drivers
According to CEO Bourla, without the prospective COVID fueled results, Pfizer is primed to grow sales at a 6% pace and increase EPS by 11%. The company anticipates as many as 25 new drug launches by 2025 with up to nine of those with $1 billion or greater annual sales potential.
Management also forecasts 2021 revenue from $59.4 billion to $61.4 billion, a 44% increase over the 2020 results.
The chart below provides reasons for management's optimism
Source: Metrics Statista/ Chart by Author
Aside from the 21% sales decrease recorded by Enbrel in 2020, a list of the company's drugs provides products that are experiencing stable sales at worst and robust sales increases in several instances.
In FY2020, Ibrance sales increased 9%, generating $5.4 billion in revenue. EvaluatePharma projects Ibrance sales will hit $9.623 billion by 2026.
Eliquis garnered $4.9 billion in revenues while growing sales by 18%. FiercePharma forecasts Eliquis sales will increase at a CAGR of 7% through 2026 (Bristol-Myers Squibb (BMY) splits revenues from Eliquis with Pfizer.)
FirecePharma also projects sales for Pfizer's Prevnar 13 products should hit $706 billion by 2026.
Global Xeljanz revenue grew 9% to $2.4billion. Revenues for Vyndaqel/Vyndamax reached $1.3 billion, having grown 170%. Xtandi revenues were up 22% while revenue from global biosimilars grew 68%, adding $1.5 billion to revenues.
In addition to the current portfolio of products, Pfizer has 95 potential new therapies or indications and 24 drugs in Phase 3 clinical trials.
Two Potential Stumbling Blocks
Patients treated with Xeljanz have been shown to be at greater risk of heart complications and cancer. The issue may be related to the entire class of JAK inhibitors. Considering Xeljanz generated over $2.4 billion in revenue last year, and that AbbVie's (ABBV) drug Humira can be used for many of Xeljanz's indications, that should give investors pause.
A second concern relates to the number of competitors to Pfizer's COVID vaccine. The possibility exists the number of vaccines produced could reach a point that a supply glut exists.
Pfizer's Dividend
The current yield is 4.30%. The payout ratio is a bit above 48%, and the 5 year dividend growth rate is 6.35%.
Due to the recent spin off, investors will experience a marginal decrease in the dividend once Viatris initiates its own dividend. Shareholders of Pfizer received 12 shares of Viatris for every 100 shares of the parent company. The reduction will be equivalent to the sum devoted by Viatris to its dividend.
Pfizer's Stock Price
Pfizer currently trades for $36.30 a share. The average 12 month price target of 13 analysts is $38.57. The price target of the 6 analysts rating the stock following the latest earnings report is $39.50.
The company has a current P/E of 29.27x, a forward P/E of 11.38x, and a PEG of 1.86. Note these metrics do not include the possibility of a surge in profits that could result from an annual COVID booster shot.
Pfizer Stock Forecast
By shedding its slower growing assets, Pfizer management is creating a culture that focuses on developing and commercializing new, innovative drugs. Furthermore, the current portfolio provides a number of growing products.
The company projects annual revenue increases of 6% through 2025, accompanied by double-digit growth on the bottom line. Pulling out the revenues generated by the vaccine, Pfizer expects EPS to grow 15% in 2021. With the vaccine included, EPS should increase by 41%.
Now consider the wild card manifested by Pfizer's vaccine going forward. With an increase in vaccination prices, coupled with the possibility of annual booster shots, Pfizer's growth could be turbocharged.
Investors should also bear in mind that major pharmaceutical companies are trading at an average of 13 times projected 2021 earnings. Taking into account the current valuation of the S&P 500, that presents a bargain basement investment opportunity. According to JP Morgan analyst Chris Schott, pharmaceuticals haven't traded at this low a relative valuation in at least twenty years.
With all of this in mind, I rate Pfizer stock as a BUY.
One Last Word
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