In the last year Pfizer has got a lot of attention. But does it make Pfizer a good investment?
Opdateret: 3. maj
Rightfully so, Pfizer has got a lot of attention in the last year. However, attention doesn't always convert into a good investment. In this analysis I will look at the core of the company and try not to give too much attention to their Covid-19 vaccine, which has boosted their profit in 2021.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
I would like to start this analysis a bit different from my usual analyses. Pfizer was the first company to develop a vaccine against Covid-19, in cooperation with BioNTech. Obviously, it means that Pfizer has turned 2021 into a very profitable year, as the vaccine is expected to bring in $26 billion in 2021. However, the competition is increasing, and I believe we will see sales drop going forward, as other alternatives are cheaper and easier to handle. One of these is the Covid-19 vaccine of Novavax, which is a protein adjuvant vaccine and not a mRNA vaccine like Pfizer's. It means that it can be stored in a refrigerator, which makes it much easier to distribute, and it almost gives as high a protection as Pfizer with 90 % protection (Pfizer is 95 %). At the same time, it is a bit cheaper at $16 per dose compared to $19,50 per dose of Pfizer. There are much other Covid-19 vaccines in the making, and my personal favorite might be from a Danish company called Bavarian Nordic, which uses the cVLP technology, which is a technology that is already widely used but takes longer to develop. Vaccines using the cVLP technology can also be stored in a refrigerator and should give much longer protection that other technologies. The protection might be so long lasting that you only need one jab in a lifetime. Anyway, this analysis will be about the core business of Pfizer, and I will be looking at the 2020 numbers, which is before they really started distributing their vaccine.
Pfizer is an American multinational biopharmaceutical company that was founded in 1849. It is among the largest pharmaceutical companies in the world (2nd largest in the world) and is located in New York, USA. They focus on six different therapeutic areas being Internal Medicine, Oncology, Hospital, Vaccines, Inflammation and Immunology, and Rare Disease.
As with all other pharmaceutical companies it is not difficult to determine a moat for Pfizer. All pharmaceutical companies, including Pfizer, have a secret moat due to their patents. Meaning that once you invest in pharmaceuticals you need to be up to date with their drugs, and their patents. Pfizer's most sold drugs are Prevnar (both Prevnar 13 and Prevnar 20), which generates $5.850 million in revenue, Ibrance with $5.392 million, Eliquis with $4.949 million, Xeljanz with $2.437 million and Vyndaqel/Vyndamax with $1.288 million. All these drugs have patents that expire in 2025-2027 except for Vyndaqel/Vyndamax, which expires in 2024. However, they have applied for a patent term extension on Vyndaqel/Vyndamax to 2028, which is currently pending. Revenue of Vyndaqel/Vyndamax, Prevnar 13/20 and Eliquis all grew last quarter, while the of Xeljansz and Ibrance were slightly down. Nevertheless, the performance of the core drugs of Pfizer is solid.
Their CEO is Albert Bourla. He first joined Pfizer in 1993 and had held various positions in the company before becoming the CEO of Pfizer in 2019. He is educated as a veterinarian, with a Ph.D. in the Biotechnology of Reproduction. He is known as a proven and trusted leader that has worked his way up in Pfizer by delivering great results along the way. Like his predecessor, he believes that delivering value to shareholders is a marathon and not a sprint, and his goal is to deliver a 6 % CAGR until 2025. However, he has previously stated that he was frustrated about how the Pfizer stock has performed, as he believes that they deserved to be credited. He was the man behind the spin-off of their large Upjohn generic business, which together with Mylan created Viatris. The reason is that he wanted to transform Pfizer from a diversified pharmaceutical conglomerate into a science innovation business. As a person that invest in pharma, I personally like his view on the sector, as he has previously stated: “The biggest misconception of the pharma business model is that whatever is good for shareholders is bad for patients. In fact, the reverse is true”. All in all, I think Albert Bourla has shown great leadership during the pandemic being the first company to develop a Covid-19 vaccine, and I personally like the transformation of Pfizer into a science innovation business.
I have determined that Pfizer has a strong secret moat. And I really like the management as well. Now let us investigate the big five numbers in order to see, if Pfizer does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number I investigate is the return on investment capital, also known as ROIC. We would like to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. Looking at the ROIC of Pfizer, it certainly looks good. It is only in one benchmark it doesn't reach the requirement and that was during a global pandemic. These numbers are very encouraging.
The next numbers I will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. Ouch, these numbers are very underwhelming. While the sales growth rate alone shouldn't prevent you from investing in a company, you would certainly like to see much better numbers than these.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Not exactly what you would like to see. Some of the benchmarks are disastrous, while other are underwhelming. Pfizer doesn't meet the requirement in any of the benchmarks.
The Equity Growth Rate is the most important of the four growth rates. While Pfizer only meet the requirements in one of the benchmarks, the numbers certainly look better than in the last two growth rates I investigated. These numbers wouldn't discourage me from investing in Pfizer, but they don't make me excited neither.
Finally, I investigate the Cash Growth Rates. A bit of a mixed bag. It is encouraging to see that the latest benchmark is meeting the requirement, and hopefully this trend will continue going forward. However, you cannot ignore the numbers in the other benchmarks, which have been underwhelming.
To sum up the five numbers. The most important number will always be the ROIC, and the numbers are solid, as they above the required 10 % in each of the benchmarks excluding the last one, which was doing a global pandemic. The equity growth rate is the most important of the growth rates, and while they numbers don't excite me, they are not bad as such. We might see a trend moving forward when looking at the cash growth rate, but historically the numbers have been bad. The numbers in the sales growth rate and the EPS growth rate are certainly bad and discourage me. Based on the numbers alone, I would probably look elsewhere, but remember there are more to a company than just the historical numbers.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on Pfizer, I can see that Pfizer has 3,7 years earnings in debt. It is a higher than I would like but the 0,7 years extra in debt doesn't prevent me from investing in a company.
Based on my findings so far, Pfizer has their ups and downs. All investments come with a risk, and Pfizer are also facing some risks. One risk that always comes with pharma companies is drug pricing. Lately, we just had some news regarding the Reduced Costs and Continued Cures Act, which would allow price negotiation by Medicare. It is too early to say if it will get approved in Congress and how it will affect pharmaceutical companies moving forward. However, drug pricing is not a new discussion and so far, the strong pharmaceutical lobby has prevented it to be something that would affect the companies. Nevertheless, it is a risk as 52 % of their revenue comes from the United States. Another risk when investing in a pharmaceutical company is the patent expiration of their drugs. Right now, Pfizer still have plenty of years left on the patent of their most sold drugs and could further apply for patent term extensions. However, patents will expire eventually, which is why you need to be aware of these, if you are investing in pharmaceutical companies. Finally, the competition in Covid-19 vaccines is a risk. It may affect the revenues of Pfizer from 2022 and onwards, and if revenues drop, there is a chance that the stock price will as well.
One way to deal with the risks is, like with other pharmaceuticals, their pipeline. Pfizer does have a lot of interesting drugs in their huge pipeline that consists of 95 potential drugs (27 in phase 1, 35 in phase 2, 24 in phase 3 and 9 in registration). I cannot go through all 95 drugs in their pipeline but will look into some that I believe is the most interesting ones. The first one is abrocitinib, which is a treatment of atopic dermatitis, and is expected to eventually generate $3 billion. FDA was expected to give their decision on approval in early Q3 2021 but unfortunately had to extend the time frame. Another interesting drug in their pipeline is ARV-471, which is a treatment of patients with locally advanced ER+/HER- breast cancer (which is approximately 80 % of all breast cancers). So far in the preclinical trials and the phase 1 trials, ARV-471 in combination with Ibrance have shown promising results. It could end up being great news for not only Pfizer but also for everyone suffering from breast cancer around the world. They are also developing a Lyme disease vaccine, which is the only candidate in clinical development. It is estimated that 476.000 Americans are diagnosed and treated for Lyme disease each year, which means there are a great potential for a vaccine. They are also developing a mRNA flu vaccine, which Pfizer believes could be superior versus existing flu vaccines. It could be another potential growth story for Pfizer. Finally, their biosimilar section is growing at a rapid pace, and compared to Q2 in 2020, it grew 88% in Q2 2021, and they are determined to make biosimilars a meaningful part of their business, which would be a counter to the Reduced Costs and Continued Cures Act.
All right, we have gone through the numbers, potential and risk regarding Pfizer, and now it is time for us to calculate a price for Pfizer. In order to calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use an EPS as it is now at 2,36 (a bit lower than 2019 but higher than 2020). I chose an Estimated future EPS growth rate of 6 (which is the growth rate Albert Bourla has mentioned until 2025), Estimated future PE 12 (which the double of the growth rate, as the historically PE for Pfizer has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $12,54, and we want to have a margin of safety on 50 % so we will divide it by 2, meaning that we want to buy Pfizer at price of $6,27 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". In order to do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The Operating Cash Flow last year was 14.403. The Capital Expenditures was 2.791. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 1.953,7 in our further calculations. The Tax Provision was 477. We have 5.610 outstanding shares. Hence, the calculation will be like this: (14.403 - 1.953,7 + 477) / 5.610x 10 = $23,04 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 3,43 and a growth rate of 6 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $35,99.
I believe that Pfizer is an interesting company with a good management. However, their historical numbers in most growth rates are concerning. On the other hand, I think they have an interesting pipeline and I like the transformation the company is making, which could possible drive more growth going forward. For me to invest in Pfizer, I would probably need 50 % discount to intrinsic value on two out of three calculations, meaning that Pfizer would get interesting to me at the TEN CAP price at $23,04.
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