Scaling The Cliff
Bob Dylan was right: "The times they are a-changin'". And for Pfizer (PFE), those changing times mean navigating a post-pandemic world and a looming patent cliff. Can they rise to the challenge, or will they be singing the blues?
Pfizer hardly needs an introduction. Founded 175 years ago in 1849 and publicly listed in 1942, Pfizer boasts a market cap of over $160 billion, with highly liquid options trading against its equity.
However, this stock has been on a bit of a rollercoaster lately.
With revenues exceeding $240 billion between 2021 and 2023, largely from vaccines and cancer treatments sold in over 200 countries, Pfizer's reach is undeniable.
But after hitting a record high of $61.71 a share in December 2021, it's taken a nosedive – more than a 50% drop.
So, what gives? Well, it's mostly a combo of waning demand for their Covid-19 products and the dreaded patent cliff looming over some of their top-selling drugs.
At the moment, Pfizer's portfolio paints a mixed picture, with some drugs shining brightly and others facing a cloudier future.
Their pneumonia vaccine duo, Prevnar 13 and 20, remains a reliable workhorse, raking in $6.4 billion in FY23, a 3% increase. With Prevnar 20's patent secure until 2033, it's a safe bet for continued success.
Eliquis, the blood thinner co-marketed with Bristol-Myers Squibb (BMY), is also holding its own, bringing in a respectable $6.7 billion in FY23, up 5%. However, the looming threat of generic competition in 2028 could put a damper on its future prospects.
On the other hand, Vyndaqel, a combination heart and nerve drug, has been a true standout, boasting a remarkable 36% jump in revenue to $3.3 billion in FY23.
Doctors have embraced it for treating a heart condition called ATTR-CM, but its patent situation remains uncertain with a potential expiration in 2024, unless Pfizer's extension to 2028 is approved.
Not all is rosy in Pfizer's garden though.
Comirnaty, their COVID-19 vaccine, may still be pulling in a hefty $11.2 billion in FY23, but it's a far cry from its FY22 peak. Sales have plummeted 70%, and those booster shots aren't exactly flying off the shelves anymore.
As for Paxlovid, the once-promising COVID-19 treatment, this drug has suffered an even more dramatic fall from grace, with revenue crashing 92% to $1.3 billion in FY23. To add insult to injury, Uncle Sam returned a staggering 6.5 million treatment courses.
Meanwhile, Ibrance, their breast cancer treatment, is also feeling the heat, with sales down 6% to $4.8 billion in FY23. It's facing tough competition overseas and its patent is set to expire in 2027, adding further pressure on its future performance.
To make matters worse, several other Pfizer blockbusters – Inlyta, Xeljanz, and Xtandi – are also staring down the barrel of patent expiration in the next few years.
This looming patent cliff poses a significant challenge for Pfizer, as these drugs have been major contributors to their revenue stream.
The company will need to rely on its pipeline of new drugs and strategic acquisitions to offset the potential losses and maintain its position as a leading player in the pharmaceutical industry.
Does that mean, then, that the $43 billion Seagen acquisition in December 2023 could become a lifeline for Pfizer?
Facing a double whammy of declining blockbuster sales and the looming patent cliff, Pfizer isn't sitting idly by. Seagen brings a fresh arsenal of patent-protected cancer-fighting drugs to the table, including three promising antibody-drug conjugates (ADCs).
Two of these, Adcetris for Hodgkin lymphoma and Padcev for urothelial cancer are already showing blockbuster potential, having raked in $751 million and $479 million, respectively, in the first nine months of 2023, despite the acquisition's timing.
But Pfizer's ambition doesn't stop there.
With five new therapies and six label expansions slated for oncology alone by 2026, they're banking on biologics like ADCs to fuel their growth.
They predict these cutting-edge treatments will surge from 6% to 60% of their cancer revenues by 2030, potentially yielding eight new blockbusters.
For now, Seagen's arrival is a much-needed boost to their oncology sales, which dipped 4% to $11.6 billion in FY23, even with Seagen's $120 million contribution in the final weeks of the year.
While the Seagen acquisition helps Pfizer tackle its goals of dominating oncology and fueling pipeline innovation, it's not the whole picture.
Pfizer's got a few other tricks up its sleeve: maximizing new product performance, trimming costs, and playing the capital allocation game to keep shareholders happy.
They're even planning a $3 billion spending spree from late 2023 through 2024, aiming for a cool $4 billion in annual cost savings. Talk about tightening the belt while expanding the empire.
Speaking of empires, Pfizer's 4Q23 results were a bit of a wake-up call.
Earnings per share (EPS) tanked to $0.10 (non-GAAP) on revenue of $14.2 billion, a far cry from the $1.14 EPS and $24.3 billion revenue of the previous year.
For the full year, EPS dropped a whopping 72% to $1.84 (non-GAAP), with revenue down 42% to $58.5 billion.
But, if you ignore those pesky Covid-19 products (Comirnaty and Paxlovid), the top line actually grew a bit – 8% in Q4 and 7% for the whole year.
Just remember, that Paxlovid revenue reversal in Q4 wasn't pretty, slashing both GAAP and non-GAAP EPS by $0.54.
Fast forward to Q1 2024, and Pfizer's numbers were a bit more cheerful, at least compared to what the analysts expected.
Non-GAAP EPS came in at 82 cents, a solid 30 cents above the consensus.
Revenue did fall 19.5% year-over-year to $14.9 billion, but even that beat estimates by $900 million.
Management's still sticking to their FY2024 guidance of $58.5 billion to $61.5 billion in revenue and $2.15 to $2.35 in non-GAAP EPS. We'll see if they can deliver.
That Seagen deal wasn't cheap, though, adding a hefty $31 billion to Pfizer's debt pile. As of March, they had about $12 billion in cash and marketable securities against over $61 billion in long-term debt. Yikes.
Still, management's determined to keep raising those quarterly dividends, now up to $0.42 a share in early 2024. That's a lot, considering it ate up 91% of their non-GAAP earnings in FY23 and is projected to gobble 78% in FY24.
With all that debt, don't expect any more stock buybacks in 2024. Pfizer's taking a break from that game, just like they did last year.
Despite Wall Street's lukewarm reception to Pfizer's patent cliff strategy, it's important to remember that this pharmaceutical giant is far from down for the count.
So, sure, Pfizer's 2023 revenue took a 42% nosedive compared to 2022, but let's not forget: over 620 million people worldwide still rely on their meds.
They actually scored nine FDA approvals, sold more pharmaceuticals than anyone else on the planet, and they're not sitting idly by while their product sales decline. Clearly, they're making moves.
The current bargain-basement price of Pfizer's stock, trading at a P/E of 10.4 on FY25E EPS, coupled with a juicy 5.9% yield, might just be the cherry on top for savvy investors willing to bet on the company's ability to navigate these turbulent times. Whether they can pull it off is anyone's guess, but at this price, it might be worth a gamble.
