Pfizer: Management’s M&A Activity Improves Outlook (NYSE:PFE)

Investment Thesis

In my last post on Pfizer (NYSE:PFE) back in March I took a bearish stance, arguing that, although the company experienced sensational growth in 2021, both in terms of revenue – up 92% year-on-year – and share price – up 64% year-on-year – these gains are almost entirely due to its COVID vaccine Comirnaty, and its COVID therapy, Paxlovid, and given these 2 assets sales may decline rapidly as we exit the pandemic years, investors ought to Pfizer’s revenues and its share price to start falling again.

I made the argument that, if you take away Comirnaty and Paxlovid’s contribution to Pfizer’s revenue generation, its remaining assets drive 6% growth to $44.4bn in FY21, which is less than another Big US Pharma, Bristol Myers Squibb earned – $46.4bn. BMY’s current market cap valuation of $161bn is nearly half that of Pfizer’s $291bn, so if, as expected, sales of Comirnaty and Paxlovid decline in 2023 and beyond, then Pfizer’s valuation will begin to look far too high.

In fairness to Pfizer, its shares have declined in value by just 2% since my March note, whilst the S&P 500 is down >15%, so the company has held up well against the prevailing bear market, and it’s important to note that the reversal of Pfizer’s fortunes – prior to 2019 the company’s share price had been stagnant for ~5 years, and its revenues had declined by 24%, to $41.7bn – has coincided with the appointment of its CEO, Albert Bourla.

Can Bourla, having driven the sensational 92% revenue uplift of 2021, and forecast for another 21% uplift in 2022, potentially to >$100bn, navigate the company through the post pandemic era as successfully as he did the pandemic era?

With the pandemic being a « Black Swan » event that nobody could have predicted with accuracy, shareholders cannot realistically expect Bourla to double revenues again – he deserves all the plaudits and praise for creating, in partnership with BioNTech, the world’s most successful and widely used COVID vaccine – and the CEO will know that it will be almost impossible to prevent revenues dropping by ~20-30% at least between 2022 and 2025 if he does not put a contingency plan in place.

Bourla does have current assets of $54bn however (according to the company Q122 10Q submission), giving the CEO the opportunity to invest substantially in M&A activity to try to help Pfizer cushion the blow of falling COVID revenues if he so chooses. So far, he has been taking that opportunity.

In my last note, I was a little critical of Pfizer’s M&A activity, noting that they had so far acquired only Trillium Therapeutics, a speculative oncology play in the CD47 immunotherapy space, for $2.26bn, and Arena Pharmaceuticals, and its pivotal trial stage S1P Modulating drug Etrasimod indicated for various auto-immune conditions, in a $7bn deal.

Last week, however, Pfizer followed up these 2 purchases with the acquisition of Biohaven (BHVN), in an $11.6bn deal, gaining access to its migraine drug Nurtec – an oral CGRP inhibitor. The Pharma was already heavily invested in Biohaven, but this deal could return $6bn p.a. in peak oral GCRP franchise revenues, Aamir Malik, Pfizer’s Chief Business Innovation Officer has told analysts.

The Arena deal is also beginning to look like good business for Pfizer, as it recently delivered positive results from a Phase 3 trial in Ulcerative Colitis (« UC ») and the Pharma is planning to file for approval this year. For good measure, Pfizer has also announced that it plans to acquire ReViral, and its antiviral therapeutics targeting respiratory syncytial virus (« RSV »), in a $525m deal.

In a recent post on BioNTech – Pfizer’s development partner for Comirnaty with whom it shares revenues 50/50 – I was critical of BioNTech management expanding its sales force whilst opting against deploying any of its near $20bn of cash on M&A.

Comirnaty is BioNTech’s only commercialised product, so arguably its need to invest in revenue generating assets and companies is even greater than Pfizer’s – but I must say that it is the Big US Pharma that has taken the initiative, recognising that its current assets and pipeline are not sufficient to grow the company or maintain its current valuation, while BioNTech’s management has sat on its hands and seen its valuation nose-dive.

The most obvious deal for both parties would be to merge with one another, or for Pfizer to acquire BioNTech, but the fact that this particular deal has never been under serious discussion tells us that neither management wants it to happen. The relationship may have soured, since neither company feels it can’t do without the other.

In the rest of this post I will consider Pfizer’s Q122 results in some more detail, discuss the Biohaven deal, and try to look ahead at what the next 5 years may look like for Pfizer, and how that ought to affect its valuation going forward.

Q1 2022 Earnings Under The Microscope

Pfizer promised us $98 – $102bn of FY22 revenues last year – a stunning accomplishment that not even Johnson & Johnson (JNJ), with its market cap of $466bn – 58% higher than Pfizer’s – will match this year – and the Pharma has certainly delivered with its Q122 results.

Pfizer reported $25.7bn of revenues – and reiterated its FY22 revenue guidance, lowering its forecast adjusted diluted EPS slightly, to $6.25 – $6.45, from $6.35 – $6.55 – which would reflect 61% operational growth over FY21 if achieved. The forward PE based on adjusted EPS would therefore be ~8x, which is up there with the world’s most profitable companies, such as Berkshire Hathaway (BRK.A), JPMorgan Chase (JPM) and Bank of America (BAC), and superior to any of its rivals in the US Big Pharma space, where the average PE ratio is ~23x.

Behind the headline figures is where the problems lie however. Ex-Covid, revenues were +2% year-on-year, which is sluggish by comparison to most other Pharmas, and as I commented in my last note, covering FY21 earnings:

Pfizer’s biggest revenue drivers ex-COVID in 2021 were the blood thinner Eliquis which earned $5.9bn of revenues – up 19% year-on-year; breast cancer therapy Ibrance, which earned $5.4bn, about the same as in 2020; pneumococcal vaccine Prevnar, which earned $5.2bn of revenues, down 11% year-on-year; JAK inhibitor Xeljanz (for auto-immune conditions), which earned $2.46bn, flat year-on-year; Vyndaqel/Vyndamax, which earned $2bn, up 55%; prostate cancer therapy Xtandi, which earned $1.12bn, up 26%; and tyrosine kinase inhibitor Inlyta (indicated for kidney cancer), which earned $1bn, up 26% year-on-year.

Together, these assets made up ~49% of Pfizer’s non Comirnaty / Paxlovid revenues of $44.4bn in FY21, and when we add in Pfizer’s Hospitals division revenues of $7.3bn – up 5% year-on-year, and biosimilars division, where revenues grew 51% to $2.34bn, 71% of Pfizer’s non-COVID related portfolio is accounted for.

Amongst these assets, prospects for revenue growth that can compensate for declining COVID related revenues are relatively low, which explains why Pfizer needs to spend. The Q122 earnings presentation refers to $25bn of risk adjusted revenues that can be added to 2030 top line expectation, but where are they coming from?

Etrasimod – if successfully improved not just in UC but other auto-immune conditions – could add $5bn of revenues to Pfizer’s top line, based on its comparable mechanism of action to Bristol Myers Squibb’s (BMY) Zeposia, forecast by management to make $5bn p.a. It could even make more – AbbVie’s auto-immune drugs Skyrizi and Rinvoq are expected to earn a combined $15bn in selected auto-immune markets – but it is never going to match forecast sales of Paxlovid – $22bn – or Comirnaty – $32bn – in 2022.

Looking Beyond 2022

Which brings us to what happens after 2022 – in Q122, Comirnaty made sales of $13.2bn, which implies that the remaining $18.8bn sales forecast will be spread across the final 3 quarters of the year, with sales probably falling in each quarter. Paxlovid sales – $1.5bn in Q122 – will likely grow in each quarter as manufacturing and distribution are brought up to speed.

When asked about guidance for 2023, however, Pfizer’s Chief Financial Officer (« CFO ») Frank D’Amelio would not be drawn in response to one analysts’ suggestion that Comirnaty could be in line for sales of $17 – $18bn in FY23, whilst CEO Bourla commented:

I will say that for 2023, there are going to be a lot of puts and takes because there will be likely new innovation that is coming that we need to see how that plays and also changes in the business models, right? There is a chance that the U.S. will go to private market in the next year. I think likely international, they will continue with governmental purchases, and we do have a contract for these purchases that goes ’23 and beyond at ’24. So there are a lot of puts and takes that will be in play here.

Management were a little more bullish concerning Paxlovid, so if we optimistically speculate that between them, Paxlovid and Comirnaty generate $18bn + $20bn of revenue in FY23, then their top line contribution is likely to fall by ~$16bn, and remember, half of Comirnaty revenues are shared with BioNTech.

Etrasimod + Nurtec could make up $5-$10bn of that sum, but likely not in 2023, since one is recently commercialised and the other not yet commercialised. Pfizer believes there is $1.5bn of annual revenue available from ReViral’s RSV programs, although this looks set to be a competitive market, with Moderna hopeful of bringing an MRNA RSV vaccine to market, so nothing is guaranteed here.

Ritlecitinib is another asset trumpeted by management in its earnings presentation – the alopecia treatment met its primary endpoint in a Phase 2b/3 trial in August last year, and there are currently no approved therapies for the disease in the US, although Eli Lilly (LLY) and Incyte (INCY) – 2 other Pharma giants – are also in this race to market, with the prize being blockbuster (>$1bn per annum) sales, with label expansion opportunities in to e.g. rheumatoid arthritis, ulcerative colitis and Crohn’s disease.

Lorbrena, a third generation ALK-inhibitor is being designed by Pfizer to overcome the shortcomings of Xalkori, the company’s first generation ALK-inhibitor which is ineffective against brain metastases, a common side-effect of patients with non-small cell lung cancer (« NSCLC »). NSCLC is one of the most prevalent cancers, although Lorbrena will be restricted to treating ~3-5% of the patient population, analysts believe, who express AK pathology.

A Sensible Target Price For Pfizer Stock

There are further opportunities for Pfizer in Lyme Disease – a vaccine is in development – hemophilia – marstacimab is a novel subcutaneous therapy with a pivotal readout due in Q223, and a gene therapy in Phase 2 trials, with a potential $19bn market in play by 2028 – and Pfizer is targeting MRNA therapeutics, via a small partnership with Codex DNA (DNAY), and gene therapy, via a partnership with Beam Therapeutics (BEAM).

As such, $25bn of new revenues by 2030 may not be out of the question for Pfizer and its miracle working CEO, but personally, as I have said before in prior notes, Pfizer’s plans – at least those shared with investors – seem vague to me in comparison with rival Pharmas such as Bristol Myers Squibb and AbbVie (ABBV), who both also showed their ambition with mega-money acquisitions – of Celgene and Allergan respectively – and have reaped the benefits, with a $15 – $20m uplift in top line revenues – exactly what Pfizer needs.

Pfizer has the cash to complete such an acquisition without even burdening itself with excessive amounts of debt, but my feeling is that Bourla will look for mid-sized deals, rather than look at taking over a fading giant like Gilead Sciences (GILD), or Biogen (BIIB), although a move for either would certainly be interesting.

Investors therefore may have to resign themselves to the fact that Pfizer’s time as a $100bn revenue company will be short-lived. In my own discounted cash flow analysis I have revenues shrinking by 12% year-on-year in 2023, then by 4%, 4% and 3% in the following years. profit margin is another interesting question – there is no doubt that Comirnaty, and likely Paxlovid too, are driving higher margins because of the scale of the unmet need.

I believe these margins may be unsustainable so in my model I begin with an operating margin of ~60%, climbing to 62% by 2026. Nevertheless, Pfizer’s cash flow generation ought to remain exceptionally high – >$25bn per annum by my estimation, and that is going to help the company reduce its net debt leverage – long term debt position is ~$36bn – complete share buybacks, keep raising its dividend, which currently stands at $0.4 per share, per quarter, for a yield of 3% – unimpressive, by Big Pharma standards – and keep making acquisitions.

Plugging all of this into an integrated financial statement and using a weighted average cost of capital of ~11%, I have calculated a price target of $69 for Pfizer stock, Using EBITDA multiples, I have come up with a higher value of $80.

Conclusion – Pfizer Must Hold Onto Its COVID Momentum And Leave The Bad Old Days Behind To Keep Its Share Price Rising

In my last post of Pfizer in March I was bearish about the company, but reviewing Q122 results, and noting the move for Biohaven, I find myself more encouraged – after all, prior to the pandemic, Pfizer’s share price traded at $39, and today, it trades at $52.5, so despite doubling its revenues in 2 years, its share price has only risen 34%, barely outperforming the S&P 500 (until its very recent slump).

Pfizer is an enormous company with an enormous share count, however, so it will take every ounce of management’s effort to keep up recent momentum, and not return to the bad old days of falling revenues and stagnant share price.

We can be certain that revenues will decline if, as expected, pandemic pressures, recede, but I like the fact that Pfizer has been making acquisitions, if not exactly going on a buying spree, and there are not some notable pipeline assets to keep an eye on – the $25bn in extra revenue by 2030 now look slightly less out of reach. Share buybacks have also been completed – $2bn in March alone at a price of $55, with $3.3bn more planned – to try to bring a notoriously high share count back under control.

Realistically, it may be wishful thinking for Pfizer stock to reach my price target of $69, let alone $79 – its all-time peak is $59, but shareholders cannot ask for much more than CEO Bourla has delivered over the past couple of years, so I am switching my stance from Sell, to Hold.

Different Pharmas seem to enjoy bullish periods of share price growth at different times. in 2021, Eli Lilly led the way, and in 2022, AbbVie and Bristol Myers Squibb led the way. Pfizer’s next 3 earnings quarters ought to be very interesting and should be watched closely by shareholders – much may depend on Paxlovid earnings, and whether they can compensate for falling Comirnaty revenues, as well as any further clarity on revenues in 2023.

It took CEO Bourla a long while to stop talking about COVID, and start discussing the rest of the company’s assets and pipeline on the Q122 earnings call – a red flag perhaps, but then again, that is where the market’s attention is focused at the present time, and it is also where the funds for M&A are coming from. The moves that Bourla makes with Pfizer’s COVID cash are critical to the success or failure of his reign, in my view. So far, they have looked impressive.