Obviously COVID was not a thing when we purchased Pfizer in 2018. We were not expecting them to make a vaccine for a pandemic that hadn’t happened yet. But there were a lot of things we liked about Pfizer before.
Just six days after the World Health Organization declared COVID-19 a global pandemic in March 2020, pharmaceutical giant Pfizer (PFE) and German immunotherapy company BioNTech (BNTX) declared their intention to jointly develop a vaccine against the new virus. BioNTech’s version of the vaccine would use mRNA technology, which prompts cells to make antibodies to fight the virus, representing an entirely new approach.
As history shows, Pfizer made the right call in those early days. But so too did Jensen Investment Management two years prior when the investment team bought shares for the Jensen Quality Growth portfolio. While Allen Bond and the other portfolio managers and analysts couldn’t know that Pfizer would become a central player in the fight against COVID-19, they knew that Pfizer had a history of delivering.
“Obviously COVID was not a thing when we purchased Pfizer in 2018,” Bond says. “We were not expecting them to make a vaccine for a pandemic that hadn’t happened yet. But there were a lot of things we liked about Pfizer before.”
Bond arrived at his investment conclusion by following Jensen’s trademark collaborative research approach, a unique way of doing stock analysis in an industry that’s known for top-down management.
Portfolio managers and analysts start their research by screening out stocks with market caps of at least $1 billion. Then they apply Jensen’s quality lens by screening for stocks whose returns on equity are at least 15% for each of the last 10 years, as determined by Jensen’s analysts. The result is a universe of just a few hundred names.
Then they pick the names they’d like to research further. While there are no sector assignments at Jensen, managers and analysts gravitate toward areas of interest. Bond, for his part, oversees coverage on several other pharmaceutical names.
The next step is to produce a 30- to 50-page research report of their findings. Finally, they present their views to the rest of the team. For a stock to gain entry into the portfolio, the team must reach consensus during their meetings. It’s a boisterous back-and-forth meant to poke holes in the investment thesis.
“We do it this way so that we get input from everyone, and that really helps in tapping into a diverse range of thoughts,” Bond explains. But even after that, it may take time to pull the trigger if a stock’s price is too high.
A history of reliability
Pfizer gained the investment team’s votes because Bond walked the managers and analysts through its stable portfolio of drugs with strong sales, including anticoagulant Eliquis, Ibrance to treat breast cancer, Xeljanz for rheumatoid arthritis, and Prevnar 13, a vaccine against pneumococcal pneumonia. Bond also laid out Pfizer’s strategy for refilling its pipeline. And the team liked the stock’s dividend, which in the previous low interest rate environment was attractive.
“While we were not expecting Pfizer to be the highest growth business, we liked their stability,” says Bond. They also liked the price, the manager says: “We thought that it was undervalued and that their drug pipeline was undervalued.”
Bond believes that Pfizer continues to be fairly valued, thanks in large part to the revenue generated by its COVID-19 franchise. In all, Bond estimates that by 2023, Pfizer will have generated nearly $70 billion in cash flow over three years from which it can invest for future growth.
While we were not expecting Pfizer to be the highest growth business, we like their stability. We thought that it was undervalued and that their drug pipeline was undervalued.
Life after COVID-19
More than any other vaccine maker, the Pfizer name is synonymous with the COVID-19 fight, a combination of its first-out-of-the gate status. As of January 2023, Pfizer remains the dominant vaccine in the United States.
The revenue impact has been massive, to put it mildly. Sales were up 77% in the first quarter of 2022 alone. That quarter, the vaccine and Paxlovid, Pfizer’s antiviral therapy, accounted for nearly 60% of total sales.
“We don’t know how the virus will evolve, but it seems unlikely that this level of vaccination revenue is sustainable, so we have it declining in our model pretty quickly,” says Bond.
Pfizer agrees. Pfizer expects much of its COVID-19 revenues—as well as profits—to wane in coming years when COVID-19 moves into endemic status. That’s why the COVID-19 drugs do not factor much into Jensen’s future cash flow projections. However, looking out several years, the team still likes what they see due to the expected positive impact of other recent growth investments.
The secret weapon, says Bond, is Pfizer’s free cash flow, which it can use to buy up late-stage biopharma companies to add to its pipeline. Pfizer is already making moves. In May 2022, the drug maker announced plans to scoop up Biohaven Pharmaceuticals, maker of the migraine medication Nurtec, for $11.6 billion. That comes on top of a $6.7 billion purchase of Arena Pharmaceuticals, which has a portfolio of treatments for immuno-inflammatory diseases in 2022. Most recently, Pfizer made a $43 billion bid for Seagen, a leading developer of antibody drug conjugate cancer treatments.
Over the last two years, many companies found themselves beneficiaries of the pandemic. But Jensen’s stringent research process can differentiate between those that simply find themselves in the right place at the right time, and those that use the moment to set themselves up for an even brighter future.
The company discussion in this article is solely intended to illustrate the application of our investment approach and is not to be considered a recommendation by Jensen. The specific security identified is taken from a representative account of the Jensen Quality Growth Equity Composite and does not represent all of the securities purchased and sold for the Jensen Quality Growth Strategy. Our views expressed herein are subject to change and should not be construed as a recommendation or offer to buy or sell any security and are not designed or intended as a basis or determination for making any investment decision for any security. Our discussions should not be construed as an indication that an investment in a security has been or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of any security discussed herein. Individual account characteristics and performance returns may differ from those of the representative account due to the size of the portfolio, client-specific constraints, tax considerations or other factors.
Past performance is no guarantee of future results. The information contained herein represents management’s current investment approach. Certain information contained in this material represents or is based upon forward-looking statements, which can be identified by the use of terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue”, or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance and holdings of a client account may differ materially from those reflected or contemplated in such forward-looking statements.
This information is current as of the date of this material and is subject to change at any time, based on market and other conditions.
Jensen Investment Management, Inc. is an investment adviser registered under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training. Although taken from reliable sources, Jensen cannot guarantee the accuracy of the information received from third parties. Graphs, charts, and/or diagrams cannot, by themselves, be used to make investment decisions.
© 2023 Jensen Investment Management
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