Pfizer’s pipeline of innovative drugs offers good reasons to buy it here (NYSE: PFE) | Private Equity Weekly

investment thesis

I think it’s safe to say that Pfizer (NYSE:PFE) is probably one of the most unpopular stocks, not just among pharmaceutical stocks, but in the broader market view.

Pfizer Since the world emerged from the pandemic, the company has been plagued by myriad issues that have created serious headwinds for the company, causing a sharp slowdown in its COVID-19 vaccine business. Additionally, Pfizer must contend with high costs across the board while building an innovation ramp for the next big drug that could once again boost its revenue.In addition, the biggest headache for the company is patent cliff, This forces Pfizer to rely more on its innovations.

Yes, these are some serious headwinds Pfizer is facing right now, but I believe the worst is already priced in Pfizer stock.There These reasons lead me to believe the skies may be clearing for Pfizer, leading me to rate it a Buy.

Summarizing Pfizer’s road so far

When looking back at Pfizer’s performance, I feel that the way Pfizer stock has declined over the past few years requires a trend analysis of the stock, as well as some major events that have created headwinds for Pfizer. I’ve added these events to the chart below, which highlights some of the big events for Pfizer stock.

Looking at the chart itself, Pfizer was the pandemic winner until the company hit an ATH of $61.7 in December 2021, while Omicron faded. The company continued to lower its guidance for the year in fiscal 2022 due to lower-than-expected demand for its COVID-19 vaccine and products.As markets bottom in October 2022, Pfizer moves higher in anticipation of some good news, results Headwinds again in January 2023 Management guided for fiscal 2023 revenue to decline approximately 31% to approximately $69 billion.Pfizer finally issues report Fiscal 2023 revenue of $58.5 billion.

Last year, during the JPMorgan Medical Conference, Pfizer also revealed that drug patent expiration will lead to “Patent Cliff” Pfizer will lose $17 billion in revenue between 2025 and 2030, slightly less than the $18 billion analysts expected. But at the same meeting, management revealed some of their ambitions.

Over the next 18 months, the most important 18 months in Pfizer’s history, because we’re going to do something that’s never been done before, we’re going to launch 19 new products and indications. Most of these are new products, but some are indications—new indications for existing products. Starting now through mid-2024, we expect that in 2030 we will generate approximately $20 billion in revenue. Analysts were expecting, surprise, surprise, a slight decrease. So they’re valued at $16 billion, but there’s not a huge difference between the two.

Management also laid out plans to launch products that will generate approximately $25 billion in incremental revenue by the end of the decade.

In my opinion, these plans are ambitious when taken out of context, especially given the company’s performance in terms of revenue and profits.

The sharp decline in Pfizer’s revenue, and especially its operating margin, seems concerning. But such concerns only make sense if investors completely ignore the potential for future growth that its innovation roadmap may bring.

Pfizer’s innovation-led strategy revives growth

Pfizer’s first bet to counter the growth slump is to shift away from reliance on COVID-19 drugs and toward innovation. In response, the company increased its R&D spending and now allocates a higher proportion of revenue to R&D, as shown below.

At a recent biopharma conference, management said they intend to spend more on research and development this year, about $11.5 billion. Of the R&D spending, a quarter will be allocated to oncology (cancer-related), while the remaining 60% will be allocated to other projects through its R&D centers, such as respiratory RSV vaccines, cardiometabolic drugs and sickle cell disease drug projects . Acquisition of Global Blood Therapeutics in 2022.

Oncology is a major focus for Pfizer, and I believe this could lead to some big results for Pfizer as it focuses on reshaping returns. A PwC research Oncology and respiratory pharmaceutical assets are expected to be among the highest revenue generating assets in the pharmaceutical industry.

In fact, I reviewed Pfizer’s Drug R&D Pipeline And finding that more than half of their drug assets in Phase 3 development are part of the oncology focus area, Pfizer will have one to two years to launch these products if the trials are successful and FDA approval is obtained on time.

The company is also using artificial intelligence to speed up drug validation and production.tan AWS demo from last yearPfizer revealed how they are building their own proprietary generative artificial intelligence platform using Amazon’s AWS Bedrock ML ecosystem to identify and validate oncology targets during development.

In addition to oncology, Standard & Poor’s research Antibody drug conjugates (ADCs) are expected to be another growth area for the pharmaceutical industry. Here, Pfizer has also positioned itself for future growth: Seagen was acquired last year and management has hinted Make more acquisitions in the ADC space.According to my Analyze their acquisitions Pfizer has spent at least $70 billion acquiring companies across the pharmaceutical spectrum since the early 2000s.

I expect these deals will provide Pfizer with a way to innovate quickly.

Valuations show upside

To value Pfizer stock, I will use a base-case scenario model that approximates analyst expectations. I do think expectations are very pessimistic, and I’m assuming slightly higher revenue expectations based on the number of products they already have in the pipeline. If Pfizer can bring its drug assets to market faster than expected through an innovative pipeline, successful trials and regulatory approvals, these revenue numbers could be much higher. So far, the market seems pessimistic about the situation.

Here are my assumptions:

• The three-year period comes amid heightened uncertainty and pessimism surrounding Pfizer.

• GAAP operating margins should return to their long-term average of approximately 30%. However, I currently expect operating income to grow at a compound annual growth rate of 30%, which is basically in line with expectations. Management redoubles its efforts About reducing costs.

• Discount rate 8% higher than market expectationsto take into account uncertainty.

Given these expectations, I think Pfizer’s revenue growth will be in line with S&P 500 Index Long Term Revenue growth is about 3%, but far exceeds earnings growth of 8%. Pfizer’s long-term P/E should be around 19 times.

Pfizer trades at 19 times earnings, which looks cheap, especially if I consider that it trades at S&P Indices Pharmaceutical Select Industry Index (SPSIPH), currently trading at 22x forward earnings.

Pfizer’s current valuation setting puts the stock up 13.3% to about $30. Keep in mind that I used conservative estimates to value Pfizer.

The real highlights come when I add in the stock’s dividend payments, which currently stand at 6.6%, putting Pfizer’s annualized total return at around 20%.

Risks and other factors to look for

Most bad news has been priced into pharmaceutical stocks, with one exception: medical insurance prices negotiation. Negotiations between US pharmaceutical companies and CMS.gov are currently ongoing. Now, Pfizer’s breast cancer treatment Ibrance and blood thinner Eliquis is part of negotiations, which are expected to last until August 1 this year, after which the price will be announced on September 1 this year, before the election.This is still unknown and may not happen this year as pharmaceutical companies have Threatening legal action.

Other risks include competition from other pharmaceutical companies in oncology and RSV, which could create some headwinds for Pfizer.

In my opinion, these developments are here to stay and are worth watching.

focus

The pharmaceutical industry faces some legitimate challenges that have created headwinds for Pfizer and will likely continue to exist, but now that much of that headwind has been priced in, I believe Pfizer’s path has become clearer. Pfizer’s innovation-led strategy and current expansion into emerging pharmaceutical and pharmaceutical areas puts the pharmaceutical giant in an advantageous position as the market evolves and consumers’ health issues become more of a concern.

Despite the headwinds, I believe 2024 could mark the beginning of Pfizer’s renaissance, with most of the headwinds now in the past. I have a Buy rating on Pfizer.