My favourite idea of the last 12 months: Pfizer

Investing Strategies Falling Knives
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NOTE: I have revised this post to include links and further extra information. If you read the post earlier, it may be worth a re-read.

I remember Jim talking about ‘pounding the table’ regarding … Dollar tree I think?

I would like to share a table-pounding idea back in return. Actually I think this is my favourite idea for some time: Pfizer bought at its current price. What follows is opinion, please double-check it for yourself. Also, disclaimer: I bought some Pfizer stock for my account already before posting this.

The argument looks like this:

Technical analysis: Sitting less than 1% above a support at 41.4, for the last 18 months. Or put more simply, as cheap as it’s been in a long time.

Fundamental analysis: low price/earnings, whether you choose forward earnings, current year, etc. Good yield. Low debt. Spare cash.

Risks: Low? Has a variety of products; 170+ year history; has recently made enough cash to offset all past debt thanks to paxlovid and covid vaccines. It’s a large blue chip company. There is a question of ‘what replaces older products that fall off the patent cliff’ and ‘what if covid just fades away’, but even assuming earnings go back to their pre-covid trend (but with net debt now wiped out), the price is still good and the risk is low. Interest rate/recession risk is almost non-existent. Energy crisis / war risk is non-existent. China/Russia risk is non-existent. Some acquisitions going on, but that seems to be the norm for big pharma. Perhaps some amazing new covid vaccine or treatment will come along and render paxlovid/mrna vaccines obsolete? Perhaps paxlovid will stop working against new strains of covid?

“Broad market crash” risk? As a defensive, Pfizer performed well the last time the market crashed.

Moat: Pfizer has executed better than any other pharmaceutical company in the world w.r.t to covid. Has a monopoly on paxlovid and shared duopoly on MRNA vaccines. Moat is also improving because competitors are failing/disappearing:

a) Regeneron/Evusheld (monoclonal antibodies) - if I understand correctly, the original covid monoclonal antibodies don’t work against modern strains, and I think some/most are no longer authorised for use? (e.g. see below)

https://www.pharmaceutical-technology.com/news/nice-rejects-major-covid-19-players-amidst-dampened-efficacy-against-omicron/

https://www.fiercepharma.com/pharma/fda-says-astrazenecas-evusheld-can-increase-risk-infection-versus-new-omicron-subvariant

https://www.fda.gov/drugs/drug-safety-and-availability/fda-announces-evusheld-not-currently-authorized-emergency-use-us

Covid now mutates at such a rate (and with such a diversity of strains) that it is hard to imagine finding and producing and distributing monoclonal antibodies can be effective in a suitable timeframe. mAbs are also a very expensive treatment relative to paxlovid and especially relative to vaccination/boosters. I do not think we will see new mAb options for covid treatment any time soon.

b) non-MRNA vaccines, so far have proven neither as popular or as successful as MRNA vaccines.

c) Merck’s molnupavir, a primary rival to Pfizer’s paxlovid, has the alarming quality of increasing covid mutation rates. Some scientists & doctors are calling for it not to be used. Questions are also being raised over whether it actually helps much. Articles below are all from February 2023.

https://www.nature.com/articles/d41586-023-00347-z

Nature: “COVID drug drives viral mutations — and now some want to halt its use”

https://www.msn.com/en-us/health/other/merck-s-covid-antiviral-drug-might-be-spurring-new-variants/ar-AA17OZSI

https://www.yahoo.com/now/mercks-covid-19-treatment-fails-194606447.html

and most concerningly:

https://www.news-medical.net/news/20230203/Molnupiravir-related-mutational-signatures-among-COVID-19-patients.aspx

“The findings also implied that, in at least some instances, viruses with a high number of molnupiravir-induced mutations have been transmitted to other persons, albeit in a restricted manner.”

Basically, Pfizer is in a relatively good situation in terms of business execution, risk, finances and competition. Yet the price is a hair’s breadth away from the cheapest price in almost 2 years.

We face the risk of a broad market downturn and Pfizer has performed well under that circumstance in the past.

We face the risk of covid/bird flu crises and Pfizer has performed well under that circumstance in the past.

The ideal situation is for something to now trigger a change of sentiment and get the ball rolling in the upwards direction. Perhaps simply bouncing off the TA support / 18 month low will be enough by itself. Or, since Covid has been coming back like clockwork every 6 months or so, I’d suggest that will probably be a trigger - along with an associated revision upwards to expected earnings for 2023. Or perhaps a bird flu panic might bring market attention back to big pharma?

It’s also possible we’ll see a rotation into defensives generally if the market goes a bit risk-off, that will get the momentum sheep on board. Perhaps Pfizer will take some corporate action that triggers attention in the media.

Who knows? Whatever the trigger might be, my hope is to see the stock run quickly from $41.70 to about $55-60 again.

As a final note, if I recall correctly, Jim had a view that any stock, growth or value, which is extremely likely to a) still be in business and b) be on a PER under 10, in 5 years time, relative to the price of purchase, is probably a decent bet.

With no net debt and PER somewhere between 8-13x right now, and almost 4% dividend available to be reinvested to reduce the effective PER in 5 years time even further - plus a very high chance of resurgences of covid in the next 5 years that require new vaccines and more paxlovid doses than expected - I believe Pfizer qualifies very well on the ‘5 year single digit PER’ rule.

I welcome amendments/corrections/additions to the above thoughts, and I recommend that if this idea catches your attention, you should quickly research this for yourself and check if the ideas here are correct.

lux

p.s. The last time Pfizer got to this level, a few months ago, it certainly didn’t stay there very long, just minutes. I recall the day with considerable dismay. I was waiting to pile in at 41.5, but it bounced at 41.75 I think, and the next stop was… $54. Very, very, very frustrating!

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Just checked the price history on Yahoo:

Apparently in October, on the day after I was watching it closely, PFE hit $41.45 as the absolute low, but I don’t even remember that happening! Perhaps I slept through it, or missed it as it happened and then blocked out the pain of the memory, or have otherwise forgotten the exact details of mid-October 2022.

Anyway for the record:

$41.45 was the absolute low in October it seems.

The absolute low on Friday last week was $41.51.

In late 2021, $40.94 and $41.04 were the absolute lows, a couple of days apart, shortly prior to Paxlovid being announced as successful then approved for emergency use.

Mid-early 2021 (early days of vaccination, long before paxlovid) was much a lower price, with a low point of $33.36

lux

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On another forum, someone raised some concerns/thoughts about Pfizer.

Here is the reply I posted to them, which may also be of interest to some people here.

The explanation for Pfizer’s sinking stock price seems to be fairly clear: over the last 30 days, earnings projections have been significantly reduced by a chorus of analysts.

If that were so, then all the other times it dropped steadily down would likely make sense too, on the same basis.

However, they do not match that thesis - Pfizer made record earnings while it’s price dropped in an identical way previously - so I would suggest that simple narratives are not usually correct ones.

Here’s an alternative simple narrative. Pfizer’s sinking stock price recently is because the market has been ‘risk on’ since SP3600ish, and Pfizer is a defensive. This narrative is well-supported by the fact that all the other big pharma companies have seen a decline in prices lately, even though they don’t have a corresponding risk of ‘covid drug earnings cliff edge’.

For example, look at the “Pharma” section in the middle of this 3-month price change heatmap. JNJ -12%, LLY -12%, PFE -16%, BMY -12%, AMGN -17%, BIIB -11%. Even considering other categories of traditional defensive stocks we see the same sort of thing. CVX -12%, COP -16%, EOG -19%, OXY -16%. It’s not a universal truth; XOM has held up, MRK and ABBV have held up. Consumer defensive (PG, KO, CL) is only -5%. But hopefully you see my point.

Or here’s another simple narrative. Pfizer’s price has spiked with every major new covid wave, and dropped back again after covid falls out of the news. This has happened on and off fairly reliably for the last 18 months. The hype/news cycle appears to be drive many other companies (notably Nvidia on a PER around 100x at present), and it has driven Pfizer/Biontech/Moderna/Novavax’s share price to record highs in the past few years already, and currently all are near the low end of their 52 week range, so it seems fair to assume Pfizer is also part of the covid hype/non-hype cycle in the news.

Here’s another simple narrative. Momentum traders tend to move out of stocks that are going down, because they’re going down. It has always been so for probably hundreds of years. This causes prices to steadily slide up or down over time. It goes up because it went up, it goes down because it went down. Just now, Pfizer is a momentum trade in the downwards direction. Later it will be a momentum trade in the upwards direction.

How can we tell which is ‘the right one’? I don’t think any of them are ‘the right one’. It’s a little bit of all of it probably. Earnings, hype, momentum, sector rotation.

Insisting on a single simple explanation may be emotionally appealing but it doesn’t feel wise to me.

Anyway let’s take a quick look at the ‘simple narrative’ you presented a bit closer, and see how it holds up to historical fact:

over the last 30 days, earnings projections have been significantly reduced by a chorus of analyst

“Analysts” have (slowly) updated their projections into line with Pfizer’s own formally forecasted drop in revenue and earnings for 2023, which Pfizer announced 4 weeks ago.

If ‘we have realised 2022 earnings are to go down!’ was the sole, simple reason for the stock price being down today, then the price should have dumped very hard 4 weeks ago to the current level when Pfizer told everyone their guidance was to expect far lower earnings.

It should have happened then when the information became available from the horse’s mouth, rather than gradually over the following 4 weeks when someone random, sluggish and anonymous ‘analysts’ finally got around to reading Pfizer’s report and updating their ‘analysis’ to reflect what Pfizer had told everyone already in the announcement 4 weeks ago.

What is more, earnings growth over the next five years is now projected to be anemic, at best.

Firstly, who needs earnings growth when you’re on PER 10-11x?

That sort of PER year after year, plus inflation plus moat plus monopoly, is a gift directly from god.

Secondly, how accurate were ‘Pfizer analysts’ when they made 5y earning growth estimates in 2018? (answer: a million miles away! Not a single one saw 2021-2022 earnings coming ahead.)

Why listen to people who all got it totally wrong the last time?

Frankly, I don’t believe anyone can make a meaningful 1-year estimate of Pfizer’s profitability today - including Pfizer themselves.

The primary determining factor of Pfizer’s profitability being ‘fine’ or ‘amazing’, this year and next, depends on mutations in covid - a) their lethality and transmission characteristics b) their resistance to existing vaccines, to natural immunity, and to paxlovid.

The future of covid, even 3 months hence, is presently completely unforeseeable even by the world’s top experts in viral mutation.

Depending on the random mutations in covid - Pfizer may have earnings somewhere in the range of ‘roughly 8x’ - if we get a bad variant out of nowhere, as we did with Alpha, Delta and Omicron - and a huge stockpile of paxlovid and fresh MRNA vaccines are urgently required globally.

Or, poorer earnings, perhaps around 13x, if covid is magically cured and Pfizer has to rely more on all the other medicines it sells (e.g. trend earnings pre-covid, but boosted up by the lack of debt payments).

I’m pulling 8x and 13x out of the air as examples of the range we’re talking about.

You can estimate e.g. 13x formally by looking at trend earnings pre-covid (say 2019) and adjusting upwards by inflation, and subtracting out debt/interest payments in the business statements since the company is now zero net debt thanks to the covid windfalls, and adding in 2 fudge factors - expiry of older drugs and some level of paxlovid/vaccine sales regardless of what happens.

Likewise, for the 8x figure I’m simply taking 2022 earnings and assuming they repeat if we get the Omicron/Delta type scenario and a ton of vaccine and paxlovid is needed.

However, 8x-13x is certainly not the entire range of possibility.

It’s also possible a ‘nightmare variant’ might come along, with e.g. current-day ‘off the charts’ transmissibility, current-day ‘highly resistant’ immune escape, but combined with e.g. SARS-COV-1’s (2002-2004) high lethality - it had a proven 9% mortality rate.

SARS-COV-1 is a hard proof that this very specific family of coronavirii we are dealing with as covid, can sometimes have super high lethality rates in humans unexpectedly, even in very advanced healthcare systems like Hong Kong’s, depending on how mutations interact with our organs and immune systems.

So in addition to the likely 8-13x range on earnings, there’s a bit of bonus ‘lottery ticket’ optionality, but let us hope humanity doesn’t win that lottery.

Anyway. For the sake of argument let’s suppose we take a middle of the road figure.

You’ve mentioned $4/year for the next 3 years. Cool, let’s go with it, for talking sake.

That would put Pfizer on a current PER of almost exactly 10x (at today’s price of $40.80), for the next 3 years, with no net debt, and a global, hard-to-breach monopoly moat/

And with a product that is so ‘non-discretionary’ that you literally risk dying if someone doesn’t buy it for you.

Total addressable market: every human on the planet, at a fair price anyone can afford.

Is this not a table pounding bargain?

Perhaps I am simply ignorant of the options out there.

Do you know of better alternatives that would be more table-pounding than this, today?

I would like to ask you to name 5 other companies in the top 100 of the SP500, which have an amazing Pfizer-like combination of both value and quality and highly-defended monopoly moats, as Pfizer has right now at the current price.

Recap of what I’m looking for in these 5 candidates:

  • Highly defended moat surrounding a global monopoly/duopoly on big money earners.

    • (By moat I mean limited competition and high barriers to new products e.g. the cost and difficulty of clinical trials + medical sales/logistics)

  • Non-commodity product that is so essential you may literally die if you don’t buy it.

  • Credible expectation of around PER 10x continuing for years to come in a reasonable outlook.

  • And a 4% yield on top while maintaining that PER 10x…

  • Net cash / zero debt.

  • Long established company, e.g. >20 year track record, preferably with a diverse product range to back up earnings (not a one-trick pony).

  • Demonstrated ability to execute on R&D, validation, production, and sales/distribution at global scale at hitherto-unforeseen speed, in order to exploit global crises/opportunities.

  • Low or zero exposure to present risks from China, Russia, energy crisis, inflation.

  • Low to zero chance of company falling apart within 3 years.

It is my sincere hope you can show me 5 such companies, because, by god, I would love to invest in all of them!

The closest example I can think of is perhaps: TSMC (big moat, excellent in execution, 12-13x PER, 2% dividend, semi-essential, but a large china risk).

If you do not think you can provide 5 similar alternatives from among the top 100 SP500 companies, will you agree that this could be a table-pounder, at least for the sort of person like myself who likes “Quality at a Value Price” types of company?

Thank you again for your reply.

lux

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I also thought this would be the case after China reopening. I thought surely with hundreds of millions of new cases that there would be all sorts of mutations that start spreading around the world. So far it hasn’t happened, or if it has happened, it’s been minor mutations with small effect. Furthermore, governments around the world are backing off of vaccine purchases, and even if they restart purchases someday, they will demand far lower prices.

I’ve also been looking at Pfizer for many years. I was invested in it for a while in the 90s (a relative worked there, and I had a kind of affinity). Interesting enough, solely from a price standpoint, it’s roughly at 1999 prices now. I may buy some today, just to slowly leg in at/near the 52-week low.

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I also thought this would be the case after China reopening. I thought surely with hundreds of millions of new cases that there would be all sorts of mutations that start spreading around the world.

I talk about this a lot with a friend who’s a genetics researcher in charge of a lab in Scandinavia. (I’m a researcher too with a little familiarity with bioinformatics.)

We’ve shared a big concern since the start which is ‘what happens when covid infects someone whose immune system can’t fully fight it off?’.

You then get an arms race inside a single body, that eventually results in hyper-mutated covid that has a lot of experience in winning fights against everything the human immune system can throw at it.

There’s a theory this may be why Beta showed up first in South Africa; there are high levels of HIV infections and thus impaired immune systems, that provide it with an easy sparring ground. Any country with high HIV rates (or high cancer rates) or generally poor health (much of the poor regions of Asia for example) can have a higher risk in this sense, there’s nothing special about South Africa.

There’s also a theory that this is where omicron came from. Omicron sort of sprang out of nowhere, like finding a robotic techno-dinosaur walking the streets. It’s nothing like the prevailing covid strains of the time immediately before it arrived. It’s as though it was simmering away somewhere secret and isolated, for a long time, practicing how to beat humanity’s immune systems, till it got an opportunity to spread further.

Another thing that can happen is if covid makes a jump to a species of animal, bounces around that species for a bit (optimising itself for that animal’s immune system), then jumps back to humans again, heavily mutated.

Two other sources of hyper-mutation / major evolutionary jumps might be a) idiots tinkering with covid in a lab, to see what they can make it into (whether with good intent or bad). b) chemical induced hyper-mutation as we see with Merck’s molnupavir.

Anyway getting back to your point. Basically, by infecting China, covid got access to a massive ‘speed boost’ to it’s evolution but not one that would take place overnight.

China has quite a few people with immune-system impairing conditions. It’s 25% of earth’s population. So covid gained 33% extra human-sized immuno-compromised playgrounds to train against and practice in.

It wouldn’t be reasonable to expect new mutants to arise ‘immediately’, through that effect.

Everyone in China got covid practically at the same time, so they all got the same strain. The massively high R0 meant there wasn’t time for ‘Chinese Whispers’ to reshape covid much as it moved along from person to person.

My theory is that we will now see new strains of covid on a 33% accelerated timetable going forward, but it will still take months for strains to evolve inside someone’s body. China animal/meat markets also add a significant new risk factor for covid’s evolution, but again, that doesn’t just happen overnight.

Furthermore, governments around the world are backing off of vaccine purchases, and even if they restart purchases someday, they will demand far lower prices.

It’s not really about vaccines, I mean, they’re great and will provide a steady revenue stream for Pfizer. But I have yet to see a product with the kind of pricing power (or pricing power potential) that paxlovid has. A few weeks in ICU will cost you $20000-500000 depending on your country. A course of paxlovid costs around $500 and keeps about 90% of people out of the ICU. There are very few medical interventions with that level of success and value for money, and there are practically no compelling alternatives to paxlovid at present. And people often need multiple courses of paxlovid, e.g. immunocompromised people, old people.

https://www.aamc.org/news-insights/what-know-about-ba5-paxlovid-and-new-vaccines-coming-out-fall

“Paxlovid reduced the risk of hospitalization by 89% for high risk, unvaccinated patients.”

https://pubmed.ncbi.nlm.nih.gov/35653428/

It cuts death rates in half, by itself.

https://www.cbsnews.com/news/paxlovid-covid-19-drug-free-next-year-cost/

Government sweetheart deals are expiring, btw. The vaccine’s price is rising from $30 to $120.

Governments can demand whatever they like. There are no compelling alternatives to paxlovid and MRNA vaccines, and there is a monopoly/duopoly. Alternative medicines like mAbs don’t work any more (used to cost $2000-10000, too). Molnupavir doesn’t seem to work, and/or has huge risks of making covid worse globally.

Paxlovid’s category of ‘monopoly / non-discretionary’ right now, makes the iPhone look like a barrel of oil.

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I bought some more Pfizer around 36.50 this week.

Here’s the why: a picture tells a thousand words.

(Please note: this is a live link, and as the price of Pfizer/SP500 changes, the heatmap will change).

As of 20th May 2023: If you rule out financials (e.g. bank crisis), very few companies in the SP500 are down as significantly as Pfizer on a 6 month or 12 month basis.

Pfizer’s first ‘post-covid-boom’ quarter, however, has been excellent (beating expectations considerably). The CFO is talking about buybacks.

The only real bad unexpected/unforeseeable news has been the Seagen acquisition IMHO. I suspect the CEO is deliberately understating the potential revenue it may generate, while the deal is being done. I suspect the acquisition may be a little value destructive, but not to the tune of 25% of Pfizer’s worth (+ inflation + retained earnings over the last 12 months). It seems it will be paid for with long term debt at 1.25% over 10y treasury rate.

There is also a possibility the deal may not go ahead - Amgen’s similarly sized purchase of Horizon Therapeutics seems to be blocked by the US govt. The Financial Times has an article here on the topic in relation to Pfizer: https://www.ft.com/content/6a1df8a9-02e9-4b83-a143-065b14e525c0

The good news recently is the approval of Pfizer’s new RSV vaccine this week and what looks like the successful issuing of long term debt to pay for the Seagen acquisition. (RSV was a much bigger problem than usual in 2022 as people relaxed precautions against covid. It put a heavy burden on hospitals and doctors.)

I’m not entirely sure of the wisdom of Pfizer paying down cheap debt from the 0% rate era and getting new debt in the 5% rate era, but who am I to comment on such things?

It’s basically a reasonably good quality company at a PER around 9x (assuming $1/qtr going forward vs the $2/qtr of the covid era). Not much debt, low PER = classic value play.

There is the possibility of considerable upside if a very dangerous strain of covid comes along (requiring broad vaccination with a vaccine update and lots of paxlovid). I read somewhere recently that virologists/epidemiologists currently assess the chance of that at around 20% in the next 4 years or so. As a scientist myself, that sounds about right, especially when you consider the appearance of both MERS and SARS-cov1 in the last 25 years, and the sheer number of cases of covid around the world, and the rate of major mutations we’ve already seen that dodge immunity (people are getting reinfected every 6-8 months or so because of this).

Other chances of upside for Pfizer besides the basic value play / mean reversion play, are from the various products under development such as the RSV vaccine. I have no particular insight into any of these. I think there’s a chance of upside from opportunistic performance if a random major new disease comes along (Pfizer’s opportunistic performance w.r.t. MRNA vaccines and paxlovid in 2020-2022 was probably the best of any big pharma in response to covid, in terms of innovation and delivery/logistics/etc).

I continue to think Pfizer is one of the most obvious and safe value plays in the SP500 right now. Among younger investors I’ve spoken with about it, they all seem to say ‘covid’s over! Pfizer won’t make any money any more. Buy AI stocks!’.

I am happy with my Pfizer and will not be buying ‘AI stocks’.

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I suspect that any pharma stock will soon be knee deep in AI; it’s one of the most consequential - and perhaps easiest to execute - uses of AI so far:

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Thanks for your reply.

I have read other articles that suggest use of AI in pharmaceuticals may be harder than it seems, despite the remarkable achievements in e.g. protein folding / structure prediction. For example, the training data such as PDB may not actually relate especially well to the real world in many cases because of how the structures were gathered.

(FWIW my background for over 20 years is in AI research.)

When I say ‘AI stocks’, I mean it the way people used the phrase ‘dotcoms’.

There are lots of successful companies with a .com domain. But buying the hell out of ‘dotcoms’ in 2000 was not a strategy for success. The stocks that have been labelled ‘AI stocks’ by the general public this year are rather arbitrary imho and the prices are in some cases extremely insane. I do not think it will work out very well.

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Pfizer rapidly rallied from $36.x to $40.x in the space of 2 days trading, Monday and Tuesday, on relatively little new news.

It has since fallen back to $38, which I think is probably another decent buying opportunity. I am not sure we will see $36 again soon, given the strength of that rally to $40. But who knows?

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Pfizer rallied back to $40 again today. I sold the options I had bought at $36.50.

I still have options bought in the low $40s that are currently underwater.

If the price rallies to $45-50, great, if it dumps back to $36, also great.

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Back at $36.x right now.

Briefly: it’s my understanding they were testing two weight loss / diabetes drugs, with the intention to develop the best one from the early trials.

They got a great result on the first one (a couple of weeks back) and a less great result on this one.

The market has taken 5% off the price (and 10% relative to where it was last week).

I cannot possibly believe that the chances of drug 2 being ‘wildly better than already great drug 1’ were priced in as being worth 5% of the company’s long term value.

At $36.30, it’s almost at the lowest it’s been in years and I think an excellent long term and short term play. Last two times it hit $36-37, it bounced to $40 within days.

But remember to do your own research and don’t believe what you read in web posts! This is just opinion/written from memory very quickly.

good luck!

lux

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