Pfizer: More than Covid-19 vaccines
Opdateret: 29. apr.
Pfizer had a great year in 2021 and 2022 due to their Covid-19 vaccine called COMIRNATY. In this analysis you will see some numbers that show just how big years 2021 and 2022 have been for Pfizer. The question is if it is too late to invest in Pfizer or if there is more growth ahead.
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.
For full disclosure, I should mention that at the time of writing, I do not own shares in Pfizer. I have plenty of exposure to pharmaceuticals though. In my copytrading portfolio I own Abbvie, Sage Therapeutics and Royalty Pharma. If you would like to see or copy my portfolio, you can see how to do so here. I also own Novo Nordisk outside of my copytrading portfolio. Abbvie is one of my larger positions and Pfizer's drug called "ABRILADA" is a biosimilar of Abbvie's bestselling drug "HUMIRA". I only mentioned the connection between Abbvie and Pfizer to give full disclosure. As always, I will keep this analysis unbiased.
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. In 2022 Pfizer made most of their revenue from their Covid-19 vaccine Comirnaty, which generated $37.806 million in revenue in 2022, while their Covid-19 pill Paxlovid generated $18.933 million in revenue in 2022. Excluding their Covid-19 portfolio, Pfizer's most sold drugs are Prevnar (both Prevnar 13 and Prevnar 20), which generated $6.337 million in revenue in 2022, Ibrance with $5.120 million revenue in 2022, Eliquis with $6.480 million revenue in 2022, Xeljanz with $1.796 million revenue in 2022 and Vyndaqel/Vyndamax with $2.447 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.
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 believe that Pfizer has a strong secret moat. And I really like the management as well. Now let us investigate the numbers to see, if Pfizer does live up to our requirements for a strong moat. In case you want an explanation about what the 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 years. Pfizer has some underwhelming years, but these are all before 2017. Pfizer did have another underwhelming year in 2020, which could possibly be caused by the pandemic. 2021 and 2022 were a great year, which is mainly due to their Covid-19 portfolio. As we go through the numbers, you will see that these two years are often outliers. Nevertheless, Pfizer's ROIC is acceptable without being impressing, which means that the ROIC doesn't turn me away from investing in Pfizer, but it doesn't attract me either.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. The numbers are not impressing. The book value + dividend has decreased almost every year since 2012. As we saw when looking at ROIC, 2021 and 2022 have been great years for Pfizer. The question is if that will mean a new beginning or not. Another thing to note is that Albert Bourla managed to grow the numbers slightly from 2019 when he took over to 2020, which is positive.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. While it is nice to see that the numbers are positive in all years, it is not promising that the numbers have dropped from 2013 and onwards. It is positive to see that under Albert Bourla's management, Pfizer managed to grow the free cash flow from 2019 to 2020. As expected, 2021 and 2022 were an outliers compared to the other years due to the Covid-19 portfolio. Levered free cash flow margin has consistently been high, while the free cash flow yield has reached its highest point in the last 10 years in 2022.
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 earnings. Doing the calculation on Pfizer, I can see that Pfizer has 1,02 years earnings in debt, which is acceptable. Hence, debt doesn't keep me from investing in Pfizer.
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 lower drug pricing. There are two different acts that have been introduced to the Congress that should result in lowering the prices on drugs. One is the Reduced Costs and Continued Cures Act, and the other is the Lower Drug Costs Now Act. Both were introduced in 2021 but none of them has been passed the House yet. Hence, it is too early to know if any of them well eventually pass in Congress and what consequences it will have. However, it shows that there is an interest in lowering drug prices from a political side. Lower drug prices mean less profits. 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. Covid-19 vaccine. 38 % of Pfizer's revenue in 2022 was from COMIRNATY. Pfizer currently has a 64 % global market share in delivering Covid-19 vaccines. You might wonder why this is a risk. There are two reasons for that. First, I suppose that Covid-19 will disappear at some point and hopefully we won't need boosters every year, and once it does, demand will drop. Secondly, competition in delivering Covid-19 vaccines is heating up. We see alternatives that are cheaper and easier to handle, such as the one from Novavax, which is a protein adjuvant vaccine and not a mRNA vaccine like Pfizer's. It means it can be stored in a refrigerator, which makes is easier to distribute. It is cheaper as well. There are also vaccine candidates in the making that use other technologies. My personal favorite is one from a Danish company called Bavarian Nordic that uses cVLP technology, which is a technology that is already widely used but takes longer to develop. If Bavarian Nordic succeed with their cVLP vaccine, it should give protection much longer than the mRNA vaccines, while it can also be stored in a refrigerator. If we no longer need vaccines or better and cheaper vaccines will be developed, it will significantly hurt the revenue of Pfizer.
There are also potential for Pfizer. 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 89 potential drugs (27 in phase 1, 25 in phase 2, 27 in phase 3 and 10 in registration). I cannot go through all 95 drugs in their pipeline but one that I believe is one of the most interesting is called 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. Another interesting thing from their pipeline is that they are 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. The Lyme disease vaccine is currently in phase 3 and have showed some promising results. 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, as it would be used year over year with a few moderations. One drug they got approved in 2022 is "CIBINQO". It is a treatment of atopic dermatitis, and management is expecting that it will eventually generate $3 billion. Finally, management is very bullish on "PAXLOVID", which is better known as the Covid-19 pill. Management mentioned that in 2022 they estimate there were 110 million Covid-19 infections in the world excluding China, and 12 % (14 million) of those were treated with oral therapy, and Paxlovid has a 90 % of the market share. Management expects infections to increase in 2023 and beyond because of reduced vaccination rates. Management expects to begin selling Paxlovid in the second half of 2023. It could turn into a multibillion business to take over for the vaccine.
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 of 5,47 (which is the 2022 number). 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 $29,06, 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 $14,53 (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". 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 29.267. The Capital Expenditures was 3.236. 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 2.265,2 in our further calculations. The Tax Provision was 3.328. We have 5.616 outstanding shares. Hence, the calculation will be like this: (29.267 - 2.265,2 + 3.328) / 5.616 x 10 = $54,00 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 4,64 and a growth rate of 6 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $48,68.
I believe that Pfizer is an interesting company with a good management. Pfizer has had outstanding years in 2021 and 2022 due to their Covid-19 vaccine. The question is if this is sustainable and if PAXLOVID will take over and for how long PAXLOVID is needed. The uncertainty regarding the global Covid-19 situation is something you will need to consider if you decide to invest in Pfizer. If we exclude Covid-19 related treatments, I believe there are still some interesting things about Pfizer. I'm especially intrigued by their biosimilar business, which I didn't mention in the analysis. I especially like their focus focus on oncology biosimilars because it is the treatment area with the highest margins. And while Covid-19 treatments hopefully won't be needed forever, it will generate a lot of cash for Pfizer to invest in their business. Personally, there are other companies in the industry I like better and if you should invest in Pfizer, you must acknowledge that the TEN CAP price and PAYBACK TIME price are both calculated based on an extraordinary good year. Nevertheless, if you think Covid-19 will last long and you believe that Pfizer is able to invest the cash from Covid-19 into their business, I believe Pfizer around $35-40 could be a solid investment over time.
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