Is Pfizer worth owning after Covid?

Question, would you buy shares in a company whose biggest product is set to see its sales crumple in the next three years (and ‘crumple’ really means what it says – $38bn of product revenue in 2022 will drop to $10bn in 2025, if Wall Street analysts are correct)? Answer, you might, given that the stock in question is US pharmaceuticals major Pfizer (US:PFE).

It helps if you imagine that Covid-19 never burst out from wherever it did burst and that, therefore, Pfizer never partnered with the German biotech BioNTech (US:BNTX) to develop BNT162b2, or what we all called ‘the Pfizer drug’ as in 2021’s most familiar conversation piece, 'Did you have the Pfizer drug or the AstraZeneca?' But in this thought exercise Pfizer’s progress – both in the recent past and the likely near future – would look much smoother than reality. With no BNT162b2 to transform 2021’s income statement, Pfizer’s share price would not have had that super-fast upwards surge during 2021 that the chart so clearly shows. Its sales would not have doubled in the two years to 2022; nor would its operating profits have quadrupled.

In the absence of these features – and others induced by Covid-19 – there would have been no need for the correction that followed. Bearbull is no technical analyst, but Pfizer’s present position on the chart looks much like where it would be anyway if the hype, hope and reality of BNT162b2 had never needed to take place. Basically, you take a straight line from Pfizer’s low point in February 2021 to where it is now and it shows that Pfizer’s share price would have tracked a respectful distance behind its bigger – and sometimes more successful – pharma rival Merck (US:MRK), which has often seemed like the natural order of things.

Yet this is not to suggest that Pfizer is failing. Also, bear in mind the purpose of this exercise – to find shares in what we have labelled ‘the venerable superstars’ among US companies; outstanding companies whose market presence, performance metrics and likely prospects make their shares viable candidates for an equity-income fund. Pfizer’s shares sit comfortably in that context.

Start with the table, which compares Pfizer with six other major pharmaceuticals groups. Granted, it chiefly uses the rear-view mirror to make its assessments and that has obvious limitations. Nevertheless, it confirms one important factor – that Pfizer’s shares offer an acceptable dividend yield. It is 3.9 per cent on 2022’s dividend, where the payout ratio is abnormally low because profits were still at a Covid-inflated level. Even though Pfizer’s earnings are forecast to fall sharply in the current year – from $6.58 per share to about $3.62 – that will still allow the dividend to creep upwards with an acceptable level of cover. The payout ratio would rise to 46 per cent though still be below Pfizer’s 10-year average ratio (67 per cent).

Other measures of operating performance are also swollen and must shrink; for instance, Pfizer’s 37 per cent profit margin is the best of the seven. No worries. Take the longer-term view and its profit margin has averaged 27 per cent for the 10 years to 2022, a typical figure for pharma majors. In that same period, Pfizer grew its revenue by 6.3 per cent a year compound and operating profit by 7.6 per cent a year. Sure, in the next year or so those long-term growth rates will slow down. Even so, they may well remain perfectly acceptable. For instance, peering out into the indistinct future, Wall Street analysts suggest that in 2025 Pfizer’s operating profit will be almost $24bn (against a peak of almost $40bn in 2022). Yet in the longer context, $24bn in 2025 would be fine. It would mean a 10-year growth rate of 6.0 per cent from 2015’s $13.3bn.

It is worth reiterating that the backdrop to this growth would be a $28bn shrinkage in revenue from Pfizer’s main product, BNT162b2, which even by 2025 is likely to remain the group’s biggest single revenue generator. By then, the chief internal rival is likely to be Eliquis. This anticoagulant, which is an improvement on warfarin, made sales of $6.5bn in 2022, a figure that may touch $8bn by 2025. That would still be $2bn short of the Covid vaccine and the drug’s revenue may start to dip soon after its patent protections run out. Not far behind Eliquis should be Pfizer’s Prevnar group of vaccines, which protect against streptococcus bacteria.

All this is another way of saying Pfizer looks fully capable of continuing to go uphill despite the effect of a very big component simultaneously thundering downhill. It contrasts sharply, for example, with the situation at Merck where its major product, a cancer treatment called Keytruda, is expected to grow its revenue from 2022’s $21bn to $29bn-plus by 2025, or by 40 per cent. That sounds fine, but not so good when slotted into a wider context. Without Keytruda’s impact, Merck’s revenues would actually fall in the coming three years to 2025 since, overall, analysts expect group revenue to grow by less than $6bn, or just 10 per cent, in that period.

Therefore – reverting back to the chart – it is feasible to imagine the respective chart lines for Pfizer and Merck swapping places in the next few years. Certainly, it is easier to imagine that than it is to see shares in GSK (GSK) – the former GlaxoSmithKline – catching its two pharma rivals. Not for nothing does GSK appear to be the dunce among the seven whose data makes up the table; the numbers for its five-year growth rates are particularly poor. Thus it seems that GSK’s shares had their little run in the 12 months up to May 2022 as it became clear that the group really would split itself into two – a pharmaceuticals side and its consumer healthcare interests, much of which had their roots in Pfizer. That done, GSK’s share price performance has reverted to the mediocrity with which investors are so familiar.

Feasibly, share price performance may be rescued by activist investors, who have prowled around GSK before and have every reason to do so again. Equally feasible is a takeover bid. After all, with a stock market value of £62bn, GSK has become extremely bite-sized – it is by far the smallest of the seven in the table. Indeed, this is the chief reason why its shares remain in the Bearbull Income Fund.

One further thought is that it makes little sense to hold both GSK and Pfizer in the same private investor portfolio. Their chart lines seem to confirm the notion that their price movements will be too similar for them to provide much volatility reduction. It is either one or the other. In practice, GSK’s shares sneak ahead in terms of dividend yield since there is a 15 per cent withholding tax on Pfizer’s dividends that cannot be outmanoeuvred, except for shares held in a Sipp. Adjust for that and the Pfizer yield is really 3.3 per cent to GSK’s 3.8 per cent. Whether that half-a-point difference is sufficient to hold shares in the inferior group seems very doubtful. It depends how much you believe in activist investors at GSK or that sentiment running against Pfizer will turn.