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Pfizer: Protracted Selloff Makes This Best Time To Buy For A Decade

Pfizer: Protracted Selloff Makes This Best Time To Buy For A Decade

Pfizer world headquarters in New York City, USA.

Investment Overview

In my previous analysis of Pfizer’s stock growth potential released in June, I recommended a “Hold” position. I acknowledged Pfizer’s attractive dividend yield of over 5%, but noted that the stock had stalled for a decade.

Since then, Pfizer’s stock price has declined an additional 10%. As a result, my outlook has changed, and I now recommend a “Buy” position. This article will explore the reasons for this shift, with the recent losses making Pfizer’s shares exceptionally undervalued. Despite COVID-related revenue declines and upcoming patent expirations, Pfizer remains a dominant force in the global pharmaceutical industry.

Pfizer’s recent successful product approvals for both pipeline and acquired products indicate strong revenue growth potential that can offset projected losses from patent expirations. If Pfizer achieves its goal of generating $84 billion in revenue by 2030, my discounted cash flow analysis suggests that the company is worth around $60 per share, far above its current trading price of $32.5.

While reaching $60 per share may be ambitious, I will explain why I believe Pfizer’s shares are finally poised for sustained growth.

How Pfizer Secured the Funds for Business Turnaround

Before the pandemic, Pfizer (NYSE:PFE) faced significant challenges. Its revenues had been declining year after year, from $52.8 billion in 2016 to $41.7 billion in 2020. Additionally, many of its best-selling drugs were set to lose patent protection soon after 2026, including Eliquis, Xtandi, Prevnar, Xeljanz, Vynqadel, Inlyta, and Ibrance.

Despite this, Pfizer’s ability to generate net income remained impressive, with margins ranging from 23% to 40% between 2018 and 2020. However, the company had limited cash and significant debt, which raised concerns about its ability to address upcoming challenges.

Then, the COVID-19 pandemic hit, and Pfizer quickly emerged as a frontrunner with its successful COVID vaccine, Comirnaty, and later with the approval of Paxlovid, a highly effective COVID antiviral. These unexpected revenues from Comirnaty and Paxlovid, totaling $55.7 billion in 2021 and 2022, significantly improved Pfizer’s cash position and provided an opportunity to fortify the business against patent expirations.

Pfizer’s Strategic M&A Activity: Strengthening the Business or Creating Complexity?

In November 2020, Pfizer completed the spin-out of its “Upjohn” legacy brands division, merging it with generics company Mylan to form Viatris (VTRS). Although Pfizer relinquished some successful brands like Lyrica, Viagra, and Lipitor, their revenues had been declining due to expired patents. This move allowed Pfizer to focus on its drug development business, which benefits from patent protection and control over drug pricing.

Using the cash windfall from its COVID vaccines and antivirals, Pfizer has embarked on a significant M&A spree since 2021. The acquisitions include Trillium Therapeutics, Arena Pharmaceuticals, Biohaven, Global Blood Therapeutics, and Reviral, amounting to a total expenditure of around $27 billion in under two years. Currently, Pfizer is also pursuing a $43 billion deal for Seagen, an antibody drug conjugate (“ADC”) specialist. While this aggressive spending has contributed to the decline in Pfizer’s stock price, it positions the company to capitalize on new revenue opportunities.

Pfizer’s Vision: Combining In-House Pipeline and Business Development for $45B in New Product Revenue by 2030

Pfizer’s key advantage lies in its global manufacturing, marketing, and logistics infrastructure, along with more than 80,000 employees who can leverage the potential of both in-house and acquired pipeline assets. The company’s plan is to generate $20 billion in revenue by 2030 from its existing pipeline, and an additional $20 billion from recently acquired assets.

A slide from Pfizer’s Q2 2023 earnings presentation illustrates the recent successful product approvals. These include Nurtec, which belongs to the calcitonin gene-related peptide (“CGRP”) inhibitor drug class and is expected to achieve peak sales of approximately $6 billion per year. Additionally, the acquisitions have added promising products such as Oxbryta for Sickle Cell Disease and innovative candidates for various conditions.

Pfizer aims to grow its revenues from $52 billion in 2025 to $84 billion by the end of the decade, offsetting the anticipated loss of $17 billion due to patent expirations. The company’s projected 6% compound annual growth rate in non-COVID product sales is supported by a robust pipeline and attractive market opportunities.

Another slide from Pfizer’s presentation demonstrates the revenue growth potential, excluding COVID-related products. Although challenges exist, such as competition in the autoimmune and neuroscience markets, Pfizer’s strong in-house pipeline, combined with potential contributions from the pending Seagen acquisition, positions the company for success.

Conclusion: Pfizer’s Stock Undervalued at <$35 Per Share, an Attractive Buying Opportunity

Considering Pfizer’s target of $84 billion in revenue by 2030, my discounted cash flow analysis suggests that the shares should be valued closer to $60 today, rather than their current price of $32.5.

Note: The above tables are for illustrative purposes, but they align with Pfizer’s own guidance and utilize historical figures to provide an accurate representation.

While Pfizer’s stock has previously reached $60 per share only once in its history, the company is undergoing significant changes. By divesting non-core divisions and leveraging its solid investment-grade credit rating and available cash, Pfizer has set the stage for potential future growth. Despite challenges, Pfizer’s valuation at a forward price to sales ratio of less than 2.5x and its nearly 5% dividend yield make it an appealing investment option with significant upside potential.

As a former Pfizer bear, I now see the current stock price decline of over 35% this year as a derisked buying opportunity that’s hard to resist, especially as management positions the company for long-term success.