Pfizer – An opportunity or a falling knife?

PFE - Pfizer

Pfizer is a global biopharmaceutical giant engaged in the manufacture and development of healthcare products. It is one of the largest global pharmaceutical companies with more than $50 billion in revenues. The company has a presence across major therapeutic areas including Oncology, Inflammation & Immunology, Vaccines, Internal Medicine and Rare Disease.

Founded in 1849, Pfizer has come a long way to become a leading healthcare company with manufacturing sites in 58 locations and sales in 125 countries. The U.S. accounts for nearly 50% of Pfizer’s total sales while the rest of the world accounts for the rest of 50%. Pfizer’s vast distribution network enables it to provide more than 40 billion doses in just one year. The company has a wide portfolio of medicines, vaccines, and consumer healthcare products and is known for popular drugs like Prevnar among others.

The company’s business can be divided into three distinct business segments – Pfizer Biopharmaceuticals which accounts for 56% of revenues, Upjohn (37%) and Consumer Healthcare (7%). Pfizer is in talks to merge its consumer healthcare business with GlaxoSmithKline’s consumer healthcare division.

Investment Data

Revenue Growth & Market Exposure

Pfizer is known for its consistent and reliable supply of high quality medicine. Few of its blockbuster products are Prevnar, Lyrica, Ibrance, Eliquis, etc. Its long history in the healthcare industry has helped it develop strong ties with other large pharma companies and develop iconic products. The company recently completed its Consumer Healthcare joint venture with GSK.

Pfizer is constantly researching and developing medicines and vaccines to address the unmet needs of its patients. The company invested nearly 15% of its revenues on R&D last year. It received seven key approvals during the last year, spanning both brand new molecular entities and new indications. The company is running 96 key innovative programs currently in various phases of development. Extensive patent portfolio, huge R&D facilities, strong technical expertise, and strict government regulations are strong competitive advantages for Pfizer.

Pfizer currently has 285 active programs for launched medicines in 53 countries. The company is also growing its presence in emerging markets. It is undertaking various global programs to increase access to medicines in these markets. Investment in Sterile Injectable business and portfolio of potential biosimilar candidates also act as key growth drivers for the company.
Pfizer is estimating a 5-year revenue CAGR of nearly 6% immediately upon the anticipated closing of the Upjohn- Mylan transaction. Post this transaction, Pfizer will become a science-based company with a strong focus on innovation. The company is also making steady progress on its next wave of pipeline assets which positions it well for future growth.

Dividends

Pfizer is a Dividend Starter. The company had announced a dividend cut back in 2009. Since then, it has paid uninterrupted dividends for nine years in a row, prior to which it had continuously paid dividends since 1988. It returned $20 billion to shareholders in the last year, through a combination of dividends and share repurchases.

Pfizer currently sports a reasonable payout ratio of 49% and an annual average dividend yield of 3.9%. It last raised its payout by more than 6%. The company updated its 2019 financial guidance, increasing the midpoint of the range for adjusted diluted EPS by $0.18 operationally. Given its dividend growth of 7% CAGR over the past five years and growing global demand for healthcare and biosimilars, the company is poised to comfortably raise its payout in the single-digit range.

Pfizer’s significant cash flow supports capital deployments within the business and friendly shareholder returns. Its earnings have grown at an impressive rate of 18% CAGR in the last three years. The company continues to make steady progress on its next wave of pipeline assets and on strategic acquisitions. Pfizer is focusing on business development initiatives through smaller acquisition and licensing opportunities for mid-stage compounds. The company makes for a stable and quality dividend paying stock given its recession-proof business. Strong demand for healthcare products acts as a strong tailwind for the company.

Competition

Pfizer competes with leading global medical companies. It faces competition from generic pharmaceuticals and biosimilars. Pfizer suffers from intense price competition from generic forms of the product. Some of the leading industry names are Abbott Laboratories, Eli Lily, Roche Inc., Novartis, Merck & Co, AbbVie, AstraZeneca, etc. Pfizer’s biggest concern is the loss of patent protections in 2026 and beyond. The company, however, is trying to mitigate its effects by focusing on strengthening its pipeline and making strategic acquisitions.

Bottom Line

More than 784 million people around the world used Pfizer’s medicines and vaccines in the last year. A relatively recession proof business model, extensive global presence, and a huge portfolio of products form a deep competitive moat around Pfizer. The company stands a good chance to gain from its innovation streak and a strong pipeline of products. Pfizer’s growth in emerging markets and in biosimilars also positions it well for future growth.

However, just when it showed an ability to keep up with the S&P 500, it drops. So what’s the unknown unknown that trigger those drops over the years? As you know, when the yield is equal, you have to beat the S&P500 otherwise why bother? Out of the drug manufacturers, Pfizer has the worst Piotroski-F score with a 3 which automatically mean it’s a pass for me not to mention the dividend growth is pretty minimal around 3.5%.

PFE vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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