Pfizer Inc. (PFE, Financial), the giant drug maker and a super hero of the Covid-19 pandemic, has given up all the gains from the last four years now that the pandemic has waned. The stock is now trading at the same level as it was in 2018-19. Does this mean the stock offers value?
The company earned a bonanza from its Covid vaccine (Comirnaty), which it co-developed with German partner BioNtech (BNTX, Financial) and antiviral combination Paxlovid. As can be seen from the chart below, its free cash flow more than doubled in 2021 and 2022 from its Covid vaccine and drug.
For the second quarter, however, Pfizer disclosed that revenue fell 53% from a year ago with the decline primarily due to expected reduction in Paxlovid and Comirnaty sales.
Investor trends
Investors are currently riding the artificial intelligence hype train, bidding up tech stocks like Apple Inc. (AAPL), Meta Platforms Inc. (META, Financial), Tesla Inc. (TSLA, Financial) and Alphabet Inc. (GOOG, Financial), among others.
Health care investors are also chasing the stocks of hot pharma and biotech companies like Novo Nordisk A/S (NVO, Financial) and Eli Lilly and Co. (LLY, Financial), which have come out with weight loss drugs Ozempic and Muanjaro, creating huge excitement in the stock market. All this has taken the shine off Pfizer now that the Covid-19 pandemic is old news.
Seagen acquisition
Pfizer has recently used its Covid windfall to buy biotech company Seagen Inc. (SGEN, Financial) after engaging in a bidding war with Merck (MRK, Financial). Howver, the market movement suggests investors feel it overpaid for the cancer specialist.
Seagen is an industry leader in antibody drug conjugate research and, in the use of this technology, the treatment of cancer. ADCs are medicines designed to harness the targeting power of antibodies to deliver small molecule drugs to the site of the tumor.
The company is commercializing Adcetris for the treatment of several types of CD30-expressing lymphomas, Padcev for the treatment of locally advanced or metastatic urothelial cancer, Tukysa for the treatment of certain HER2-positive metastatic breast cancers and Tivdak for recurrent or metastatic cervical cancer.
Beyond the four products in its commercial portfolio, Seagen has a healthy pipeline, which could further contribute to Pfizer in the years ahead.
Seagen's valuation
According to the GF Value Line, Seagen appears to fairly valued based on its historical ratios, past financial performance and future earnings projections. As such, it does not appear than Pfizer is overpaying for the company.
Pfizer's drug pipeline
Pfizer recently disappointed the market when it announced that it had discontinued the development of a compound (lotiglipron) for obesity and type 2 diabetes mellitus due to elevated levels of liver transaminases, which indicates potential liver damage. It said that it is continuing the development of a sister candidate, danuglipron, for the same indication.
However, during the second quarter, Pfizer achieved numerous drug and vaccine approvals, positioning itself ahead of competitors in terms of efficacy and safety. This strategic advantage is expected to boost the company's market share within the rapidly expanding pharmaceutical industry.
One milestone was the Food and Drug Administration's approval of Abrysvo, a vaccine designed to prevent respiratory syncytial virus in older individuals, at the end of May. Soon after, in July, the director of the Centers for Disease Control and Prevention also endorsed the Advisory Committee on Immunization Practices' recommendations, paving the way for the vaccine's widespread use in combatting the deadly virus. This development opens up immense commercial opportunities for Pfizer as millions of older people will gain access to the vaccine, leading to a reduction in hospitalizations and fatalities for respiratory diseases.
Moreover, on June 23, the FDA approved Litfulo, making it the first drug on the market to treat severe alopecia areata in both adults and adolescents. Subsequently, four days later, its Ngenla finally received approval for its use in treating children with growth hormone deficiency. Ngenla has already been approved in over 40 countries and boasts extensive long-term data supporting its favorable safety profile and high efficacy. This approval is expected to mitigate the impact of declining sales of Genotropin, another growth hormone treatment.
Meanwhile, the company reported on its website that as of Aug. 1, it has 90 drug candidates in various phases, with 29 candidates in Phase 1, 28 in Phase 2, 23 in Phase 3 and 10 drug products in the registration phase with regulatory authorities.
Pfizer's valuation and prospects
Pfizer appears to be deploying the huge profits garnered from its Covid drugs intelligently in further enhancing its pipeline via acquisitions as well as internal development. The stock is currently trading with a forward price-earnings ratio around 11. This looks like a modest price to pay for a large and innovative big pharma with global reach.
The GF Value Line show the company is significantly undervalued, which is consistent with my assessment.
Similarly, the GuruFocus Valuation Chart shows that the company is significantly undervalued on a number of metrics.
At 86 out of 100, Pfizer's GF Score indicates it has good outperformance potential. The company scored highly on profitability, growth, value and financial strength, but has a low momentum rank.
The company pays an excellent and growing dividend, currently yielding over 4.50%.
Conclusion
Overall, my assessment is that Pfizer is a low-risk investment opportunity for conservative investors. Not only is the company selling at an attractive valuation level, it has an excellent dividend yield. It also has a wide economic moat and massive resources to continue to build its drug pipeline, both through acquisitions and internal research and development.
My approach with investing in big pharma is to follow the late J. Paul Getty's advice: "Buy when everyone else is selling and hold until everyone else is buying."
Right now, with Covid receding, investors' attention has been diverted by AI and the new anti-obesity drugs. Meanwhile, Pfizer has declining sales after an incredible run-up during the pandemic. As such, its stock has fallen to pre-pandemic levels.
Meanwhile, Covid has not entirely disappeared. Like the flu, it will likely become endemic. This means, like the flu, there will be a continual need for boosters in the years to come as new variants surface. It is a goose that will keep on laying, perhaps not golden eggs, but silver and bronze ones.
Further, the market is ignoring the fact the company has booked the Covid profits and is investing them heavily in building out its pipeline. Pfizer is now well-positioned to deliver steadily far into the future.
