Pfizer: Short-Term Concerns Overshadow Long-Term Benefits from COVID-19 Success

Perhaps no company is more associated with COVID-19 treatments than Pfizer (PFE). It orchestrated the unprecedented development, approval, and deployment of Comirnaty (the Pfizer/BioNTech COVID-19 vaccine) in 2020. In 2021, Pfizer followed up by introducing Paxlovid, an anti-viral that has proven highly effective at preventing hospitalizations due to COVID-19 infections.¹ Both products have been essential in quelling the worst effects of the coronavirus pandemic.

From a financial perspective, the successful marketing of these products resulted in a sharp increase in revenue and earnings over the past two years and has positive implications for Pfizer’s ability to invest in its drug pipeline in order to support future growth prospects. However, short-term uncertainty regarding the duration and magnitude of this financial benefit and the impact of expected drug patent expirations has contributed to stagnation in Pfizer’s share price.²

Comirnaty and Paxlovid sales likely peaked in 2022, as demand for COVID-19 treatments has plummeted from 2021. A recent poll by Kaiser Family Foundation found that two-thirds of American adults do not plan on getting a COVID-19 vaccine soon.³ Concurrently, the U.S. government announced that it would stop paying for COVID-19 vaccines,⁴ and we expect government policy for Paxlovid reimbursement will soon follow suit. As a result, we project Comirnaty and Paxlovid sales will each decline by more than 50% in 2023.

Additionally, Pfizer also stands to lose approximately $17 billion in sales over the next several years due to the loss of exclusivity (LOE) on several large drug franchises. These include blockbusters Ibrance (breast cancer) and Eliquis (blood thinner). However, LOEs are commonplace among biopharmaceutical companies and, in this instance, Pfizer has communicated the issue consistently and transparently.

Assuming the market is efficient, it stands to reason that near-term risks should be “priced in” to the stock. We believe investors should look to the long-term and focus on the impacts of cash flow generation, pending drug launches, and an improved drug pipeline.

The expected decline in Comirnaty and Paxlovid revenue belies a staggering benefit to near-term cash flow generation. The company generated $33.6 billion in cash from operations in 2021, more than the sum of the previous two years combined, and we project nearly $32 billion cash generation in 2022. Pfizer is reinvesting its cash flow in an effort to bolster its drug pipeline.

In late 2021 and 2022, the company announced three major acquisitions for a total of $23.7 billion and an additional five research collaborations. The company expects to earn $25 billion in revenue within seven to eight years from recently closed acquisitions and other business development activities. We anticipate the company will continue to deploy excess cash flow externally with a focus on new drug candidates.

Further, the company projects that an incremental $20 billion in revenue will be generated by 2030 from near-term drug launches. Pfizer recently highlighted six new molecular entities that it is planning to launch in 2023. Disease targets focus on areas of currently unmet medical need, including chronic migraine headaches, respiratory syncytial virus (RSV), ulcerative colitis, prostate cancer, and multiple myeloma. These new drugs still need regulatory approval, but we are confident in their prospects due to the strength of the clinical trial data supporting their respective new drug applications.

In total, Pfizer’s drug pipeline includes 74 new molecular entity candidates in various stages of clinical testing, with a focus on research disciplines in which scientific advances are creating new treatment options, including immunology, oncology, obesity, and diabetes. Additionally, the company is leveraging its Comirnaty success by developing next generation mRNA vaccine platforms. Despite promising early stage clinical data, Pfizer has not quantified the expected financial benefit for all these efforts. Likewise, we maintain modest assumptions for these nascent projects in our valuation model, but we believe that a continuation of positive clinical trial results could be a positive catalyst for Pfizer’s share price.

Our analysis suggests that Pfizer’s growth prospects have meaningfully improved in the past two years. Cash flow from the COVID-19 franchises has enabled the company to accelerate the pace of investment in new growth opportunities, leveraging its expertise in drug development and global sales distribution. We believe this formula will result in long-term business value creation.

¹ Katella, Kathy. “13 Things To Know About Paxlovid, the Latest COVID-19 Pill,” Yale Medicine, Doctors & Advice, February 3, 2023. https://www.yalemedicine.org/news/13-things-to-know-paxlovid-covid-19.

² Source: Refinitiv Eikon

³ Erman, Michael. “Analysis: Falling demand for COVID boosters puts price hikes on the table,” Reuters, Healthcare & Pharmaceuticals, updated October 21, 2022. https://www.reuters.com/business/healthcare-pharmaceuticals/falling-demand-covid-boosters-puts-price-hikes-table-2022-10-20.

⁴ “The US government will no longer pay for Covid-19 vaccines, treatments,” Advisory Board, Daily Briefing, August 19, 2022, https://www.advisory.com/daily-briefing/2022/08/19/covid-costs.