Pfizer Inc. (PFE, Financial) posted first-quarter earnings on May 4 that far exceeded analysts' expectations and raised its full-year guidance.
The adjusted earnings per share of 93 cents were much higher than the consensus estimate of 78 cents, and this earnings beat came on the back of strong Covid-19 vaccine sales. On May 5, the Biden administration announced support for the proposed waiver on intellectual property protection for vaccines, and if this change goes ahead, generic versions of Covid-19 vaccines will be available globally. Such a decision will dent the expected earnings of Pfizer in 2021, but the long-term earnings are unlikely to be impacted due to its strong pipeline of new products.
At a forward price-earnings ratio of just 14, Pfizer shares are trading at a substantial discount to the health care sector, which trades at an earnings multiple of 30. Pfizer, therefore, appears to be significantly undervalued from a relative valuation perspective.
First-quarter earnings recap
Pfizer reported revenue of $14.58 billion, a 42% increase year over year. The company's Covid-19 vaccine, which it developed with BioNTech (BNTX, Financial), generated $3.5 billion in global revenue for the first quarter. Pfizer announced in its first-quarter earnings report that it has signed contracts to supply 1.6 billion vaccine doses in 2021, and the company has successfully negotiated contracts with the governments of the United Kingdom, Canada and Israel to deliver additional doses of the vaccine through the end of 2023.
Eliquis, a medicine developed by Pfizer to prevent blood clots and strokes, delivered a strong performance with revenue exceeding $1.6 billion in the March quarter, a 25% increase over the corresponding period last year. Vyndaqel and Vyndamax, two other drugs that aim to treat several heart conditions, generated $453 million in revenue, reflecting an 88% increase year over year.
Commenting on the strong financial performance, CEO Albert Bourla said:
"We continued to accelerate production and shipments of our COVID-19 vaccine, in many cases, exceeding our contractual obligations for delivery timelines. And we achieved several important clinical, regulatory, and commercial milestones."
Even if barriers to generic production of Covid-19 vaccines are removed, it would take months, if not years, for another pharmaceutical company to imitate the success of Pfizer and other leading vaccine manufacturers who are benefiting from first-mover advantages. Because of this, Pfizer seems well positioned to earn higher revenue and earnings in the next few quarters.
The outlook is promising
Pfizer's Covid-19 vaccine revenue for the first quarter was higher than anticipated. This trend is likely to continue in the future. This month, the Food and Drug Administration is expected to approve the company's vaccine for use in adolescents aged 12 to 15. According to the company's earnings report, Pfizer also plans to apply for an Emergency Use Authorization for a booster shot that could defend against Covid variants in the second half of July. In September, it plans to apply for approval of its vaccine for use in toddlers and younger children, as well as infants in November.
After Pfizer and BioNTech revealed on April 1 that new data from their clinical trials showed their two-dose vaccine was safe and 91% effective six months after the second dose, the company announced a plan to apply a Biologics License Application to the FDA requesting full approval for the vaccine for individuals 16 years of age and older. All these developments suggest Pfizer is in a strong position to report good numbers at least through the end of 2022.
Pfizer announced a partnership with Myovant Sciences Ltd. (MYOV, Financial) last December to commercialize Relugolix combination therapy for uterine fibroids and endometriosis, as well as Relugolix for advanced prostate cancer. The product is under review by the FDA and a decision is expected on June 1.
Pfizer has 22 products in Phase 3 clinical trials and 10 products in the registration stage. Some of the products in these two categories are likely to reach the marketing stage in the next 12 months, and favorable FDA decisions will be a catalyst pushing the stock to new highs in the coming months.
Source: Company filings
In the short term, the Covid-19 vaccine will be the main profit driver of the company, but Pfizer's true strength is its deep pipeline of new drugs that are expected to gain FDA approval in the coming years.
Industry outlook
Research and Markets, a popular market research firm, projects the global pharmaceuticals industry to grow at a compounded annual rate of 1.8% in 2021 and reach a value of $1,700 billion in 2025, growing at a rate of 8%.
In 2020, North America was the largest region in the global pharmaceuticals industry, accounting for 46% of the market share, and the Asia-Pacific region secured the number 2 spot with 26% of the global pharmaceuticals industry market share. These two regions are expected to dominate the industry in the next decade as well, so health care companies that have established their presence in these key markets are likely to grow at above-average rates through 2030.
The aging population, cures for diseases that were previously thought incurable and massive infrastructure development investments by governments will be key growth drivers for the industry.
Technological advancements will shape the future of the health care industry as well. Increasing use of artificial intelligence and machine learning in data science will have a significant impact on decision-making optimization, ethical patient privacy management and proper use and management of large and complex data sets. Health care companies that are embracing these changes are likely to be big winners.
Takeaway
Pfizer is one of the largest health care companies in the world, and the favorable macroeconomic environment paints a promising picture of what the future holds for the company.
The strong pipeline of new drugs and vaccines should lead to higher operating cash flows in the future, which is a very good sign for dividend investors as the company will be in a position to cover shareholder distributions with internally generated cash. The quarterly dividend of 39 cents per share translates into a dividend yield of 3.9%. The company is likely to increase dividends in the future as research and development costs decline.
The expected growth in earnings and the cheap valuation multiples at which shares are trading make Pfizer a best-in-class pick for dividend investors.
Disclosure: The author does not own any stocks mentioned in this article.
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