Pfizer Is Too Cheap to Ignore
Pfizer Inc. (NYSE:PFE) had a blockbuster 2021 with the success of Comirnaty the vaccine developed to fight Covid-19. However, with the threat of the pandemic easing, revenue from Covid drugs such as Comirnaty and Paxlovid has trended significantly lower, deteriorating the investor sentiment toward the company. In the past 12 months alone, the stock has lost a staggering 33%, highlighting a rough patch for the pharmaceutical giant.
However, a closer look at the company financials, its drug development pipeline and the dividend safety reveals Pfizer is very attractively valued today.
The diversified pipeline will be key to growth
Projecting the cash flows of a pharmaceutical company is fundamentally challenging because of the massive uncertainty associated with revenue from existing and new drugs. To get a reasonable understanding of expected cash flows, investors need to evaluate the patent portfolio along with the strength of the drug pipeline.
Pfizer is currently faced with the reality of a few patent expiries in the coming years, which are likely to have a notable impact on its revenue. Xeljanz, which is used to treat rheumatoid arthritis and colitis, has already seen some patents expiring in recent years with more expirations coming up in the next three years. Ibrance, one of its best-performing drugs used to treat breast cancer, is also nearing the end of its exclusivity rights with patents set to expire in 2027. In addition to these, patents for Eliquis, a blood thinner, and Prevnar 13, a vaccine used to prevent pneumococcal disease, are scheduled to expire in 2026.
With some of Pfizer's blockbuster drugs facing IP expirations in the next few years, the company's success will mostly depend on the strength of its pipeline. The company has a solid track record of winning the Food and Drug Administration's approval for blockbuster drugs and curently has several such candidates in its portfolio.
Elranatamab, a drug developed to treat multiple myeloma, has shown promising results in Phase 2 trials. Ritlecitinib, a drug targeting hair loss and certain instances of arthritis, is in Phase 2 trials. If successful, this drug is very likely to replace some of the lost revenue from Xeljanz while opening up new doors for the company to expand into treating different types of autoimmune diseases. Giroctocogene fitelparvovec, Pfizer's novel gene therapy for hemophilia A, is currently in Phase 3 trials with recent results pointing toward long-lasting benefits in patients. Pfizer also has an RSV vaccine candidate in Phase 3 trials. If the company wins the FDA's approval for this vaccine, it would be the first-ever vaccine to protect older adults against the virus.
Healthy balance sheet supports dividends and buybacks
Pfizer enjoyed a cash windfall with the success of its Covid vaccine, and the company has been aggressively investing this cash pile over the last couple of years to boost its research and development efforts and to acquire promising biotech companies. In the fourth quarter of 2023, it completed the acquisition of Seagen for $43 billion in cash, marking one of the biggest deals in the health care sector ever. Even after this acquisition, Pfizer still holds more than $12 billion in cash.
In January, CEO Albert Bourla identified four strategic priorities for 2024, which do not include any plans to acquire new businesses. Instead, the company will focus on integrating recent acquisitions while improving operating margins by adjusting the cost base. When Pfizer executes these priorities, the company will be in better shape to boost capital returns to shareholders.
Pfizer has not repurchased stock since April 2022, but has consistently distributed more than $2 billion every quarter as dividends. In the fourth quarter of 2023, the company generated just over $5.20 billion in operating cash flows. With the company now focused on improving its efficiency, there is reason to believe that operating cash flows will grow in 2024 and beyond, paving the way for it to distribute more capital as dividends or even to initiate a buyback program given that it already holds $12 billion in cash.
Pfizer has launched a $4 billion cost reduction program to support operating margins. The company, arguably, overestimated revenue from Covid vaccine sales for 2023 and 2024, which resulted in it following a cost profile that matched those expectations. With reality now setting in, Pfizer has been quick to focus on efficiency improvements. More than $2.50 billion of these cost savings are expected to be realized in 2024.
The valuation makes Pfizer a steal
The lackluster market performance in the last two years has pushed Pfizer into attractively valued territory. The company is currently valued at a forward price-earnings ratio of 12.60 compared to the health care sector median of 20, which suggests the market is expecting it to underperform the broad sector. The company's promising pipeline, however, suggests otherwise.
Pfizer closed the Seagen acquisition last December, and the company is now well-positioned to book synergies from this deal. The current valuation does not seem to account for this reality. The Seagen acquisition has meaningfully expanded Pfizer's oncology portfolio at a time when many health care experts are expecting the global oncology field to advance rapidly in the coming years, along with the increasing use of artificial intelligence in oncology research. Seagen's expertise in antibody-drug conjugates should also help Pfizer's ADC research efforts.
The current dividend yield of around 6% boosts Pfizer's appeal further. The company has hardly been valued at a dividend yield as high as this in the past, which is a testament to the undervalued nature of the company.
Takeaway
Pfizer is transitioning from an aggressive investment phase into a phase where it will focus on optimizing its recent investments to improve the returns on those investments. This transition should improve the company's cash flows and help boost investor returns in the form of dividends and buybacks. At this crucial juncture, the company looks significantly undervalued.
This article first appeared on GuruFocus.
