Founded in 1849, Pfizer is a global biopharmaceutical company, operating a broad set of businesses including Innovative Pharmaceuticals, Generic Pharmaceuticals, Biosimilars, and Consumer Healthcare.
The investment case for Pfizer is bolstered by its diversified drug portfolio and an underappreciated drug pipeline. The company’s largest drug franchise, Prevnar, accounts for only 10% of consolidated sales and its five largest drug franchises together account for a little more than 40%. In contrast, our analysis indicates that competing biopharmaceutical companies are often characterized by extreme revenue concentration, creating the risk of dramatic sales decline when a drug loses market exclusivity. We believe this distinction is crucial, as Pfizer’s revenue diversity should insulate it from draconian ‘patent cliff’ exposure.
Over the past ten years, Pfizer has methodically revitalized its drug pipeline. At present, the company has approximately 100 drug programs at various stages of clinical development and expects 25-30 new drug approvals over the next five years. Key drug pipeline programs include immune-system based cancer treatments, novel approaches to diabetes drug regimens, vaccines targeting hospital-acquired infections, and a broad-based biosimilar effort.
In our view, Pfizer is nearing a key inflection point in terms of top-line growth. In the near-term, we expect revenue to be pressured from the loss of exclusivity on Lyrica, which currently accounts for nearly 9% of total sales. However, our model expects revenue headwinds from the loss of drug exclusivity to peak in 2020 and to subside thereafter. Simultaneously, we expect revenue contribution from Pfizer’s drug pipeline to accelerate. As a result, we expect the passage of this inflection point to result in gradual revenue growth improvement.
We believe Pfizer benefits from important ‘Quality Growth’ characteristics including competitive advantages, a consistently high return on equity, and robust free cash flow generation. Importantly, our valuation metrics indicate the stock price does not fully value the strengths of Pfizer’s business and its growth opportunities, even with relatively modest assumptions. We expect this disconnect between business fundamentals and stock price valuation to resolve itself as the company demonstrates the ability to monetize its drug pipeline while managing competitive threats to existing drug franchises.
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