Pfizer: Is it more than just COVID-19 vaccines?

Pfizer may have been the most talked-about company during the pandemic because of their COVID-19 vaccine called Comirnaty. Later, Pfizer developed the so-called COVID-19 pill called Paxlovid. However, the world has now moved on from COVID-19. The question now is whether Pfizer is more than just a provider of COVID-19 vaccines and has the potential to deliver long-term value to its shareholders. It is what I am going to investigate in this analysis.

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.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Pfizer. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. However, I do own stocks in other pharmaceutical companies such as AbbVie, Novo Nordisk, and Genmab. Nonetheless, I have no personal stake in Pfizer. If you want to purchase shares or fractional shares of Pfizer, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Pfizer is an American multinational biopharmaceutical company that was founded in 1849. Pfizer Inc. discovers, develops, manufactures, markets, distributes, and sells biopharmaceutical products. The company offers medicines and vaccines in various therapeutic areas, including cardiovascular metabolic, migraine, and women's health under the Eliquis, Nurtec ODT/Vydura, Zavzpret, and the Premarin family brands; infectious diseases with unmet medical needs under the Prevnar family, Abrysvo, Nimenrix, FSME/IMMUN-TicoVac, and Trumenba brands; and COVID-19 prevention and treatment, as well as potential future mRNA and antiviral products under the Comirnaty and Paxlovid brands. It also provides medicines and vaccines in various therapeutic areas. These include biosimilars for chronic immune and inflammatory diseases under the Xeljanz, Enbrel, Inflectra, Litfulo, Velsipity, and Cibinqo brands; treatments for amyloidosis, hemophilia, endocrine diseases, and sickle cell disease under the Vyndaqel family, Oxbryta, BeneFIX, Somavert, Ngenla, and Genotropin brands; sterile injectable and anti-infective medicines under the Sulperazon, Medrol, Zavicefta, Zithromax, and Panzyga brands; and biologics, small molecules, immunotherapies, and biosimilars under the Ibrance, Xtandi, Inlyta, Bosulif, Mektovi, Padcev, Adcetris, Talzenna, Tukysa, Elrexfio, Tivdak, Lorbrena, and Braftovi brands. Furthermore, the company is engaged in contract manufacturing. It serves wholesalers, retailers, hospitals, clinics, government agencies, pharmacies, individual provider offices, retail pharmacies, and integrated delivery systems. As with all other pharmaceutical companies, it is not difficult to determine a moat for Pfizer. All pharmaceutical companies, including Pfizer, have a moat due to their patents. Meaning that once you invest in pharmaceuticals, you need to stay updated on their therapies and patents.

Management

The CEO of the company is Albert Bourla. He first joined Pfizer in 1993 and held various positions within the company before assuming the role of CEO in 2019. He is educated as a veterinarian, with a Ph.D. in Reproductive Biotechnology. He is known as a proven and trusted leader who has worked his way up in Pfizer by consistently delivering excellent results. Like his predecessor, he believes that delivering value to shareholders is a marathon and not a sprint, and his goal is to achieve a 6% compound annual growth rate (CAGR) until 2025. However, he has previously stated that he was frustrated with the performance of Pfizer stock, as he believes they deserve more credit. 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 an investor in the pharmaceutical industry, I personally appreciate his perspective on the sector. He has previously stated, "The biggest misconception about the pharmaceutical business model is that what benefits shareholders is detrimental to patients." "In fact, the opposite is true." All in all, I believe Albert Bourla has demonstrated exceptional leadership during the pandemic as the first company to develop a Covid-19 vaccine. Personally, I appreciate the transformation of Pfizer into a science innovation business.

The Numbers

The first metric I investigate is the return on invested capital, also known as ROIC. We would like to see a 10-year history where all the figures are above 10% each year. Pfizer has had some underwhelming numbers in the past ten years. The years prior to 2017 were all below 10%. In 2020, which was affected by the pandemic, Pfizer's performance was also below 10%. The worst year for Pfizer in the past ten years was 2023, impacted by declining sales of Comirnaty and Paxlovid. Additionally, their $43 billion acquisition of Seagen also contributed to the low ROIC in that year. Overall, the numbers are not encouraging, but I believe there is an explanation for the underwhelming performance that Pfizer has delivered in 2020 and 2023. Nonetheless, I would like to see Pfizer achieve better financial results in the future.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The numbers are not impressive. The equity has decreased year over year in six out of the past ten years. However, the numbers are affected by countless acquisitions, which is why I would not give too much importance to them. Equity decreased in 2023 due to the declining sales of Pfizer's COVID-19 portfolio, but 2023 was still the year with the second-highest equity in the past ten years.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Pfizer has generated a positive free cash flow every year over the past decade. It is evident that 2023 was a challenging year for Pfizer as they delivered their lowest free cash flow in the past ten years. The free cash flow declined significantly from 2022 to 2023, as did the levered free cash flow margin. The levered free cash flow margin had been above 25% in the nine years leading up to 2023, during which Pfizer achieved a levered free cash flow margin of around 8%. Free cash flow yield is also low. While this usually indicates that the shares are trading at a high valuation, it may not be the case for Pfizer. However, we will revisit this later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings. Upon calculating Pfizer's financials, I have determined that Pfizer has 28,55 years of earnings in debt, significantly exceeding the three-year threshold. The high debt is due to a combination of a challenging 2023 and the Seagen acquisition, but it is still significantly higher than I would prefer to see.

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Risks

Based on my findings so far, Pfizer has its ups and downs. All investments come with risks, and Pfizer is also facing some risks. One risk is patent losses. Patents covering Pfizer's products typically provide market exclusivity, which is essential for the profitability of many of Pfizer's products. As patents for certain of its products expire, Pfizer could face competition from lower-priced generic or biosimilar products. The expiration or loss of patent protection for a product is usually followed promptly by substitutes that may significantly reduce sales for that product in a short period of time. Excluding the COVID-19 portfolio, Pfizer's top-selling drugs in 2023 were Eliquis, which generated 12% of Pfizer's total revenue, Prevnar (both Prevnar 13 and Prevnar 20), which contributed 11% to the total revenue, Ibrance, which accounted for 8% of the total revenue, and Vyndaqel/Vyndamax, which represented 6% of the total revenue. All of these drugs have patents that will expire between 2024 and 2027, except for Prevnar 20.

Decline in COVID-19 product sales. Pfizer experienced a significant decline in sales of its COVID-19 products in 2023. This decline has had a significant negative impact on both the revenue and profit margins of the company year over year. For instance, revenues declined by 42% operationally due to a significant decrease in sales of both Comirnaty and Paxlovid. Management believes that this has affected the stock price performance. Thus, it is not only bad for business but also for investors. Surprisingly, Comirnaty and Paxlovid combined still accounted for 21% of Pfizer's total revenue in 2023. Hence, if the demand for their COVID-19 products continues to decline, it may affect the business moving forward and result in a further decline in share price.

Laws and regulations. The U.S. healthcare industry, in particular, is highly regulated and is subject to frequent and substantial regulatory changes. It is expected that the U.S. healthcare industry will continue to be subject to increasing regulation, political, and legal actions as future proposals to reform the healthcare system are considered by the executive branch, Congress, and state legislatures. According to Fitch Ratings, U.S. pharmaceutical companies are facing escalating legislative and regulatory challenges that could heighten their business and financial risk profiles. Fitch Ratings believes that sector margins will face pressure from lower negotiated prices, while regulatory challenges to mergers and acquisitions (M&A) will make it more difficult for companies to address patent cliffs for existing products.

Reasons to invest

There are also potential opportunities for Pfizer, which could make the company an intriguing investment. Pfizer aims to achieve world-class leadership in oncology. Unfortunately, one in three people will be diagnosed with cancer in their lifetime. Thus, oncology represents one of the largest and fastest-growing therapeutic areas. With the acquisition of Seagen, Pfizer doubled its oncology research and resources overnight. Management expects that Seagen's in-line medicines will immediately enhance Pfizer's top-line growth, and the combined portfolio provides the opportunity to deliver at least eight potential blockbuster products by 2030. Pfizer recently received new approvals for their drugs. Management has stated that these recent approvals have doubled the addressable population in its oncology therapeutic area, which had already doubled this past spring. Furthermore, the Seagen acquisition is expected to be a substantial growth contributor in 2024 and beyond. The revenue from Seagen products is projected to increase from $3,1 billion in 2024 to $10 billion in 2030.

Next wave pipeline. Pfizer aims to concentrate on discovery and development within its therapeutic areas outside of oncology, focusing on vaccines, anti-infectives, internal medicine, metabolic diseases, and inflammation and immunology. Pfizer is off to a good start; its 4th-generation PCV vaccine candidate has recently entered clinical trials and received FDA Fast Track designation. Respiratory vaccine combinations are another area where Pfizer is poised to lead, building upon its successful COVID-19 vaccine. Pfizer is currently developing a standalone mRNA flu vaccine. The next-generation and potentially best-in-class HbS polymerization inhibitor represents a potential stepwise evolution over Oxbryta for sickle cell disease. Finally, Pfizer is expected to receive Phase 2 data on Ponsegromab later in 2024. Ponsegromab has the potential to be a first-in-class and the first FDA-approved treatment for cancer cachexia, which accounts for 20% to 30% of all cancer deaths significantly.

Increasing margins. Pfizer's margins have decreased recently, but management aims to increase them. One way to achieve this is through cost reductions, and management remains confident in delivering at least $4 billion of net savings from its cost realignment program by the end of 2024. This belief will put Pfizer on a strong footing towards margin expansion and increased operational efficiency moving forward. Management also mentioned that recent acquisitions were from smaller relative companies. Besides Seagen, Pfizer has also acquired Biohaven, Global Blood Therapeutics, Arena Pharmaceuticals, ReViral Biopharma, and Trillium Therapeutics since 2021. They didn't have their own manufacturing. So, all of these were outsourced, and outsourcing is much more expensive than manufacturing in-house. Pfizer plans to bring all operations in-house, but in manufacturing, this process typically takes about three years to achieve cost reductions.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 0,37, which is from the year 2023. I have selected a projected future EPS growth rate of 10%. Finbox expects EPS to grow by 10% in the next five years. Additionally, I have selected a projected future P/E ratio of 20, which is double the growth rate. This decision is based on Pfizer's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $4,74. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Pfizer at a price of $2,37 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 8.700, and capital expenditures were 3.907. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 2.735 in our calculations. The tax provision was -1.115. We have 5.646 outstanding shares. Hence, the calculation will be as follows: (8.700 – 2.735 + 1.115) / 5.646 x 10 = $8,59 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Pfizer's free cash flow per share at $0,85 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is $10,69.

Conclusion

I believe that Pfizer is an interesting company with good management. Pfizer had an abysmal year in 2023, resulting in a low Return on Invested Capital (ROIC) and the lowest free cash flow in a decade. The abysmal year was mainly due to declining sales of Pfizer's COVID-19 portfolio. While Pfizer may succeed in increasing the co-administration of its COVID-19 vaccines with flu vaccines, I still believe that the COVID-19 business will continue to decline. This is concerning, as it accounted for 21% of total revenue in 2023. Pfizer is also facing patent expiration for some of its best-selling drugs within a couple of years, which poses another risk for the company. And like all other companies in the pharmaceutical industry, Pfizer continues to face new laws and regulations that may affect its business. However, it isn't all bad for Pfizer. They have taken steps to become the global leader in oncology, which is not only one of the largest and fastest-growing therapeutic areas but also one with the highest margins. Pfizer also has many interesting drugs in the pipeline outside of oncology, which could all be future growth catalysts. Finally, Pfizer will increase its margins, and management has predicted a long-term operating margin above 30%, which is higher than the average of the past ten years. I may have been too conservative in my calculations as they are based on an abysmal year. EPS, operating income, and free cash flow are usually much higher, meaning my calculations may not accurately reflect the value that Pfizer provides. However, the numbers are still real and represent what Pfizer delivered in 2023. Personally, I believe there are better investment options than Pfizer, and I will not be purchasing Pfizer shares at this time.

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