Pfizer: a simple argument suggesting 50% return + earnings growth + dividends

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I’ve argued for Pfizer on the Falling Knives board. I want to present a more general argument for the stock. Do your own research, etc.

  1. Pfizer’s executives and analysts expect earnings this year and next to be around $3.40 - $3.50.

  2. The 20-years average of healthcare stocks by PER is 15x according to JP Morgan’s recent quarterly report on the state of the market.

  3. On balance, considering practical success like vaccines and paxlovid, and relatively good cash/debt situation, some positive optionality should covid turn very dangerous, but a lack of immediate new strong growth prospects other than e.g. their Ozempic competitor: it seems fair to see Pfizer as ‘average’. Perhaps even a little conservative.

  4. A PER of 15x $3.50 yields $52.50 stock price.

  5. The current price is $36.

  6. The argument is simply this: I believe Pfizer will re-rate towards the average for healthcare stocks over time and return approximately 50% from PER re-rating plus dividends, earnings growth.

That’s it. Pfizer’s not free of issues, but neither does it have problems especially more than the average healthcare stock, and its financials are in better shape than the average. And if anything, Pfizer has a track record of surprise to the upside with earnings, and it has better optionality in relation to covid’s evolution than any other large healthcare company.

But on the whole, it just needs to do averagely well, and it should gain nicely.

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I think your analysis is fair. I guess the share price has languished as some of the oomph has gone out of its covid vaccine/paxlovid prospects, as the gravity of covid has decreased and natural and vaccine immunity has strengthened worldwide. Does Pfizer deserve a lower than average multiple on its $3.50 earnings? I don’t know. The new shiny thing is the obesity drugs, and I can’t say how the candidates that Pfizer is advancing compare to the products from Eli Lilly / Novo Nordisk or others. And I guess I would worry about how much of those $3.50 come from the covid line which is presumably shrinking - do you know?

I had some shares, but I was far too optimistic about paxlovid and its sales - it turns out that with the new viral strains, Paxlovid doesn’t reduce mortality by 90% any more, now that we have omicron strains and most people are vaccinated, and given the fact that the baseline rate of mortality is so much lower anyways. And the interactions with other drugs seem to be a bigger deal than I imagined - in my hospital, it is rarely used, even if it is the best product in my opinion. Anyone with antiarrhythmics, antistatins, antithrombotics, benzodiazepines, opioids, etc. is steered clear of the drug by the pharmacists. Maybe this would be better if Pfizer removed the ritonavir part of the nirmatrelvir/ritonavir combination - my understanding is this was just present to reduce CYP3A4 hepatic metabolism of the effective anti-SARS component (the nirmatrelvir), so maybe now that nirmatrelvir production constraints are solved, they could just distribute it as nirmatrelvir, at a higher dose? I don’t know.

Anyways, I sold my Pfizer shares, partly because they seem to have terrible capital management, with a track record of buying a lot of expensive drugs that don’t pan out. I think a slightly lower PE ratio may be justified for them, although maybe not quite as low as 10…

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If someone was to analyse Nvidia’s prospects in 2019, they would have asked whether the high earnings from bitcoin mining were sustainable, and would have looked to bitcoin itself to form conclusions.

But in 2020 what actually mattered was covid! Out of nowhere, which meant everyone wanted a new gaming PC since they were stuck at home and had little else to spend money on for a while.

One might have questioned in mid-2020 whether this spend on gaming PCs / home office equipment was sustainable for Nvidia.

But so much free money, rained from the sky, that it created a new bubble in practically everything - including crypto. Which turned out to be the actual thing that drove nvidia’s 2021 GPU sales - to crypto miners.

If someone was to analyse nvidia’s prospects in 2022, they would conclude that with crypto in decline, and everyone still happy with a nice new gaming PC bought in mid 2020, the real question would be whether nvidia’s 40x0 series would be adequate to stimulate any new demand at all. With large stockpiles of over-produced 30x0 series, the outlook was troubling.

But actually what mattered was a series of breakthroughs in large language model research and simultaneously in diffusion techniques for imagery causing a massive hype bubble / hype spending on nvidia equipment for AI, which came totally out of the blue from the perspective of 99.9% of the planet.

I believe that neither of us really knows what will happen with Pfizer this year and next. Nor do I think we will be able to tell what will be important. I don’t even think the executives know. They have 100+ drugs in the pipeline and with the Seagen acquisition, another bunch more.

I didn’t see the Seagen acquisition coming for example. Did you? That turned out to be the main driver of the price so far this year, pushing the price down. Yet the price they paid for Seagen is just what the stockmarket was charging for Seagen just 12 months earlier, and it’s similar to offers made by other companies.

All I can say is that there is no other company in the world that executed on both vaccines and treatment medicines against covid, at global scale, and with the best outcomes, quite like Pfizer. Either they were spectacularly lucky, or something is going very right at that company, or both.

I expect demand for vaccines and paxlovid (for example) to be cyclical and a bit random, as stockpiles age or are used up, as covid mutates, and so on. Few saw ‘covid alpha strain’ arriving as soon as it did. No one expected recent strains to be relatively milder than e.g. delta. I personally didn’t expect global society to turn a giant blind eye to millions dying of covid each year and millions more suffering long covid.

Some more examples: Pfizer had two medicines similar to Ozempic for weight loss. Their plan was to evaluate them both and develop only the best one. The first worked great - better than ozempic and it’s oral. The second caused elevated liver panels. The news of the first caused a rally in the price, the news of the second caused a 10% dump in the last 3 weeks. But they were only going to develop one anyway and the first result was great, so…? if anything the ‘bad’ result has accelerated their commitment to a drug that seems to work well, rather than drawing out the decision process?

But while we’re talking about covid and weight loss drugs, maybe the real issue is the massive shortages of (everything) in hospitals and pharmacies globally right now. Cancer drugs, diabetes drugs, ADHD drugs, painkillers, etc. Or maybe it will be a broad rally in healthcare, which is performing relatively poorly just now. Or maybe it will be something we don’t see coming. Maybe it will be a sudden spike up in healthcare inflation.

Mungofitch has made the case before that if a company can achieve a PER of 10x , 5 years hence, then it probably isn’t that bad of a choice. Pfizer is there right now, and dividends and inflation will help bring it down further 5 years hence.

All I know is that the company seems better than average, but is priced at around 33% discount to the long term average for the sector. You don’t even need the pendulum of valuations to swing past the long-term sector mean to have an excellent chance of market-beating returns here.

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Yeah, I pretty much agree with everything you say there. Danuglipron looks good, and who cares about lotiglipron, which apparently worked well and whose side effects weren’t very serious either, elevated transaminases but no overt liver disease. So they developed 2 good oral anti-obesity drugs and they’re going to focus on the one that had no problems at all, instead of wasting time on something that worked well but that had some issues.

But how does danuglipron compare to other companies’ GLP-1-RA drugs? And what is the future of a GLP-1 drug, when other companies have drugs like Lilly’s tirzepatide that work on 2 targets (GLP-1 and GIP), or their oral triple agonist retatutride (GLP-1, GIP and glucagon), with phase 2 results in tLancet last week? With reductions of HB1Ac of up to 2.16%, rather than danuglipron’s up to 1.16%? I don’t know, but we can’t count on Pfizer winning this race, or even necessarily doing very well. From a societal perspective, it is very good news to have lots of competition out there, if we want these drugs to be affordable, but of course Pfizer investors will have a slightly different perspective.

But as you say, we don’t even know, at this point, what the important race is going to be, even if obesity treatment is understandably the current favourite…

dtb

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It’s easy to discuss things that are easy to discuss, such as the pros and cons of GLP-1 analogues, but it’s hard to discuss things that don’t exist in any way, haven’t been thought of yet, are responses to diseases that haven’t happened yet, and so on.

I think the easiness of discussion of the GLP-1 stuff lends itself to overfocus on things that may not be as important as they seem, all things considered. It would be like discussing whether to buy an S&P 500 tracker by discussing mostly Apple related issues. Yes, could be an important issue, but you’re buying a portfolio of things and a method of exploiting those things.

Much of the future prosperity of most pharmas is the latter kind of situation - unknown unknowns; who knows what will happen, what will work, and so on.

Viagra was a medication intended for angina. MRNA tech was a solution looking for a sufficiently good problem (for decades) to accelerate the development. Paxlovid is a HIV inhibitor that works well when combined with a novel covid-specific enzyme suppressor.

All three of these Greatest Hits of Pfizer were pretty much random luck that the company capitalised upon quickly and effectively. No one discussed them in the years prior to their discovery, but I think they shaped the company more than the things that were discussed back then.

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