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In April, I believed that Pfizer Inc. (NYSE:PFE) was trying to acquire growth as it was using pandemic-related profits to acquire companies, with the latest announced deal being the most significant, namely the purchase of Seagen.
Pfizer had something real to prove as the massive profits were squandered on M&A, with no real results being shown for, making shares of Pfizer a massive underperformer while it should have been a huge outperformer given the hand it was dealt in recent years.
Since the spring shares have moved another leg lower as pandemic-related revenue streams retreated faster than estimated, with uncertainties on the rise. While I do not applaud the massive M&A move, the current share price action starts to show real appeal, if operational discipline returns.
Understanding The Extent Of The Boom
Pre-pandemic, Pfizer generated $53 billion in sales in 2019 on which it posted adjusted earnings of $16 billion, with earnings numbers reported equal to $2.88 per share. The 5.7 billion shares traded at $40, granting the company a $228 billion equity valuation, that was ahead of a $42 billion net debt load, granting the business a $270 billion enterprise valuation. During 2020, the company posted a 2% increase in sales to $42 billion, but the nominal sales numbers fell dramatically as a result of the divestment of Upjohn.
The business played a massive role in developing Covid-19 vaccines and that was seen in the 2021 results. Sales rose 92% to $81 billion, as the vaccine business grew from $6.6 billion to $42.6 billion, with some growth outside the vaccine business seen as well. The huge profits reported and divestment of Upjohn made that net debt largely evaporated.
The company guided for 2022 sales to come in around $100 billion, as the huge earnings were used for a flurry of dealmaking which included a $6.7 billion deal for Arena Pharmaceuticals, a $525 million purchase of ReViral, an $11.6 billion deal for Biohaven Pharmaceuticals and a $5.4 billion deal Global Blood Therapeutics, with nearly $25 billion being spent on a couple of M&A deals.
Early this year, Pfizer posted 2022 sales at $100.3 billion with adjusted earnings reported at $6.58 per share, including a $57 billion vaccine contribution from Covid-19 drugs Paxlovid and Comirnaty. The boom was set to revert in 2023, with sales seen at $67-$71 billion (made up out of a $47.5 billion operational revenue contribution and $21.5 billion in Covid-19 vaccine revenue contribution). While this made sense, the $3.25-$3.45 earnings per share guidance looked soft.
With shares trading at $40 this spring, shares were trading flat compared to the pre-pandemic levels, yet the business had seen huge earnings reported in the meantime, and was trading at just 13 times forward earnings. Despite many M&A targets pursued, net debt down a lot, as the vaccine businesses only contributed to a minor extent to earnings, making me quite upbeat.
A Huge Deal
Turning a bit optimistic in February at $40, Pfizer made (or at least announced) a huge deal as it was looking to acquire Seagen Inc. (SGEN) in a $43 billion deal to add $2.2 billion in revenues from Seagen’s medicines, royalty, collaboration and license deals. While the company could contribute $10 billion in sales by 2030, it was a current 20 times sales multiple which made me cautious and made that accretion was only seen 3–4 years down the road.
Believing the deal was expensive, and Pfizer was too aggressive with dealmaking, I was upbeat on the valuation, but not too pleased with the pace of dealmaking, which was too high for me.
Coming Down Further
Since April, shares of Pfizer have fallen precipitously, having come down from levels around the $40 mark to lows around $30 here. In May, Pfizer posted a 29% fall in first quarter sales to $18.3 billion, with adjusted earnings down 24% to $1.24 per share, with non-Covid-19 revenues up 5%.
Later that month, the company priced $31 billion in debt with notes carrying coupons between 4.4% and 5.3% with maturities ranging up to 2063 in connection to the Seagen deal.
In August, Pfizer reported a 54% fall in second quarter sales to $12.7 billion which include a mere $1.6 billion in Covid-19 revenue contribution in a non-flu season of course, with operational growth reported at 5%. The company maintained the full-year guidance, other than that the higher end of the sales guidance was cut by a billion to $70 billion. Net debt was posted at $5.5 billion, but both the absolute gross cash and debt load were huge in anticipation of the Seagen deal.
And Now?
With a 5.7 billion share count, the market value of Pfizer has fallen to $171 billion, or $176 billion if we factor in the net debt load (as this is pre-Seagen, of course). Accounting for $25 billion in deals, the organic business is valued at just $150 billion here, roughly half of the valuation pre-pandemic!
There are some reasons for the share price being under pressure, as Pfizer estimates that about a third of sales will be gone through 2030 from loss of exclusivity, although this will be offset by a similar number of product debuts. M&A has the potential for 2030 sales to increase to $70-$84 billion which would be a great achievement, if it were to happen.
Of course, the Seagen deal will take some time, now anticipated to be closed later this year, or early in 2024, following some hiccups with regulators and antitrust authorities. That said, it is comforting to see that the company financed the deal already, given the move higher in interest rate markets.
In October, Pfizer announced the next quarterly dividend payment at $0.41 per share, now supporting a dividend yield in excess of 5% which would be great in any normal environment, but is on par with risk-free rates of course here.
The worse news happened in October, when the company amended the Paxlovid supply agreement with the US government, but moreover updated the full year outlook as it involves a massive revenue reimbursement.
With some doses returned, the Covid-19 contribution is seen at just $9 billion this year, with total revenues now seen at $58-$61 billion. This means that full year adjusted earnings are now seen at just $1.45-$1.65 per share, as the company announced a $3.5 billion cost saving program, of which a billion dollars is still set to be realized this year.
And Now?
Pfizer Inc. has been hit by a perfect storm of issues surrounding the Seagen deal (although European approval rolled in over the past week), a reversal of Covid-19 revenues, and weight-loss drugs actually being bad news for other pharmaceutical businesses, in the sense that these drugs have the potential to reduce demand for drugs treating other illnesses.
While the current performance is dreadful, Pfizer Inc. cost-savings efforts as well as organic growth (with the headwind from tough comparables being largely gone next year) have the real potential to stabilize the performance here, although there are some real self-inflicted wounds, in the sense of pricey and numerous M&A opportunities being pursued.
If not for the cheap share price, I would have no interest in Pfizer Inc. stock here, but sitting on a long position in the higher thirties, I am happy to double down here at $30, although some real discipline is needed, more or less recognized by the business itself. This comes in the form of a multi-billion dollar costs savings program, desperately needed as the performance is utterly soft.
