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PFE - Pfizer


dorsiacapital
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You guys! I just found this super obscure pharmaceutical company called Pfizer - anybody heard of it?

 

Okay sorry, (do think it says something wonderful/slightly disturbing about value investors that there appears to be no thread on Pfizer), been trying to think if there's an interesting play amidst this AGN/PFE mess.  I think most people are now looking at AGN, but what about Pfizer?

 

It's sporting a 4% dividend yield, it has no net debt (39 billion in cash, 38 billion in long term debt, admittedly I think that cash is mostly off shore). It's OCF last year was 15 billion. It's OCF has declined a bit over the last few years (17 billion in 2013, 16 billion in 2014) but I think is stabilizing. (Revenues, perhaps helped by Hospira acquisition, grew 7% q/q in q4.)  The pipeline appears to be reasonably promising with Ibrance, Eliquis growing and although Pfizer still has patent issues, the Lipitor loss is behind it.  They're forecasting 5% growth in 2016 fwiw. So it's a fine blue chip company but nothing too special.

 

But my real interest is in how cheap the call options are on Pfizer.  Pfizer bumped up about 3% post market when AGN news came out, but before that, Sep 16 30' calls were trading at 1.40, 33' calls at .40;  Jan 18 30 calls at 2.70.  What happens if HF arbs have to cover their PFE short, and dividend hungry investors start believing that the dividend is real (in my experience, very rare in this yield environment for a blue chip stock to trade at a 4% dividend yield for long - had similar experiences with INTC and KRFT). If it rerates to a 3% dividend yield then the stock would trade around 39.  (JNJ is at 2.75%, Merck at 3.5%). And, for reference it was trading between 34-36 for most of the year before the AGN merger happened. What do people think? 

 

 

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  • 4 years later...

I have gotten very bullish on PFE over the past week adding leap calls and shares.  I think the market is not valuing the long-term opportunity that the new vaccine has opened. I am not talking just the COVID treatment but also all the future treatments that this model will be used to development.

 

At a 12 PE and 4% yield and breakthrough developments, feels like a smart play.

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If by "this model" you mean mRNA technology, then I am not in the bullish camp (not bearish either). The mRNA technology is pioneered by BioNtech, not Pfizer as far as I can tell. And I am not so sure about mRNA modality being that easy in other disease areas. The original promise of mRNA based treatment was for cancer and there is not many good news in the last 10 years on that front. Moderna was founded to capture this opportunity in cancer and it has been > 10 years and not much to show for it. See here -

 

https://www.fiercebiotech.com/biotech/moderna-s-keytruda-combo-misses-colorectal-cancer-as-it-shows-promise-head-and-neck

 

I think the researcher (Katalin Karikó) is a Nobel prize contender at this point. However, the original idea for many entrepreneurs was to apply her fundamental breakthrough to cancer and other diseases. That has not worked out very well so far. Also see the story here for original development of mRNA modality -

 

https://www.wired.co.uk/article/mrna-coronavirus-vaccine-pfizer-biontech

 

 

 

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If by "this model" you mean mRNA technology, then I am not in the bullish camp (not bearish either). The mRNA technology is pioneered by BioNtech, not Pfizer as far as I can tell. And I am not so sure about mRNA modality being that easy in other disease areas. The original promise of mRNA based treatment was for cancer and there is not many good news in the last 10 years on that front. Moderna was founded to capture this opportunity in cancer and it has been > 10 years and not much to show for it. See here -

 

https://www.fiercebiotech.com/biotech/moderna-s-keytruda-combo-misses-colorectal-cancer-as-it-shows-promise-head-and-neck

 

I think the researcher (Katalin Karikó) is a Nobel prize contender at this point. However, the original idea for many entrepreneurs was to apply her fundamental breakthrough to cancer and other diseases. That has not worked out very well so far. Also see the story here for original development of mRNA modality -

 

https://www.wired.co.uk/article/mrna-coronavirus-vaccine-pfizer-biontech

 

I am not looking for them to solve cancer with mRNA. It would be amazing if they did, but I am realistic on the outlook. I do however believe that this could be used for other viruses. There is also plenty of other developments going in the pipeline and there is a thought process that the vaccine need will be gone in a couple of years. I am not sure if that is a reasonable assumption. There may be variants that require new shots. All of which should lengthen the profitability.

 

With projected earnings growth of 10% per year and a PE of 12, how can this be considered fairly valued? I just don't reconcile the argument. I see a target of low $40 range very reasonable for 2021.

 

 

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How much of mRNA future does Pfizer own? Don't they just have a contract for Covid vaccine and the rest of the IP/future belongs to BioNtech?

 

There appears to be multiple agreements between the firms going back as far as 2018. I see another for the common flu, which seems like a natural progression to move to given market size and opportunity. The flu will return when people start moving around again.

 

Honestly haven't looked at the entire contract. Could be a miss, but I also think that Pfizer's name is the one that is being spread around the world which provides additional support and leverage as new breakthroughs occur.  Yet here we sit at levels below 2018 and 2019 highs.

 

Dividend at ~4% ... 0.39/share going forward.

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I am not looking for them to solve cancer with mRNA. It would be amazing if they did, but I am realistic on the outlook. I do however believe that this could be used for other viruses. There is also plenty of other developments going in the pipeline and there is a thought process that the vaccine need will be gone in a couple of years. I am not sure if that is a reasonable assumption. There may be variants that require new shots. All of which should lengthen the profitability.

 

With projected earnings growth of 10% per year and a PE of 12, how can this be considered fairly valued? I just don't reconcile the argument. I see a target of low $40 range very reasonable for 2021.

 

Lots to unpack, so I will take a shot.

 

I do not see anything in their vaccine pipeline that suggests that they have internal mRNA therapeutic/vaccine candidates other than this COVID-19 which is BioNTech technology which Pfizer does not own (https://www.pfizer.com/science/vaccines/pipeline). They may have started their own internal research mRNA group but that may take years (best guess 3+ years) to come up with promising leads and then we have another year and half at least of clinical trials on top of that.

 

Pre covid era (2019) Pfizer does have a strong vaccine component (none of them based on mRNA) to their revenue lead by Prevnar (https://www.statista.com/statistics/253788/pfizers-top-products-based-on-revenues/). But that will face competition from Merck very soon. Looks to me like a story similar to Gilead where their HepC franchise made money from 2013 until 2016 end until competition (ironically from Merck) came in and slammed their revenue. So I take Pfizer's goal of 10% growth with caution.

 

So in my head here are the potential catalyst's to 10% growth -

1. Strong revenue growth from Covid-19

2. Blockbuster sales for immunology drugs approved and in the pipeline (eg. Abrocitinib). Note the current share of revenue for this class is only ~ $3B annually.

 

But the risks are -

1. COVID-19: Competition from Astrazeneca, J&J and other in Covid-19 vaccine. Others are cheaper by the way and logistics easier (don't need super cold temp)

2. Stiff competition in oncology and immunology. Black box warning for Abrocitinib (https://www.fiercebiotech.com/biotech/pfizer-s-abrocitinib-aces-fifth-phase-3-route-to-fda-decision)

3. Value destroying acquisition of "hot" biotech by paying too much for a trophy prize to show revenue growth in hot area. I would not underestimate the probability of this happening.

 

 

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I like Merck (MRK) better. Their pipeline isn’t the near term looks great albeit very depending on one molecule (Keytruda). They also have a very strong vaccine business, but nothing for COVID-19.

 

The problem with Pharma stocks (unless you buy cigar buts) is that more than half of the value is hidden in the pipeline for products that are not on the market yet. So unless you are either very good at guess ing the value of the pipeline products or are very confident about management, it is very difficult to really asses the business.

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I like Merck (MRK) better. Their pipeline isn’t the near term looks great albeit very depending on one molecule (Keytruda). They also have a very strong vaccine business, but nothing for COVID-19.

 

The problem with Pharma stocks (unless you buy cigar buts) is that more than half of the value is hidden in the pipeline for products that are not on the market yet. So unless you are either very good at guess ing the value of the pipeline products or are very confident about management, it is very difficult to really asses the business.

 

I like Merck a lot as well. Its reasonably priced but not cheap. Their pipeline is oncology heavy which is an opportunity to me more so than risk (https://www.merck.com/research-and-products/product-pipeline/). Actually I think of them as an oncology biotech, not old style big pharma anymore. They may command a price premium as oncology products have pricing power, more so than cardio-vascular/diabetes/vaccine etc. I wish they had a good immunology program but then it wouldn't be reasonably priced as it is right now.

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I like Merck (MRK) better. Their pipeline isn’t the near term looks great albeit very depending on one molecule (Keytruda). They also have a very strong vaccine business, but nothing for COVID-19.

 

The problem with Pharma stocks (unless you buy cigar buts) is that more than half of the value is hidden in the pipeline for products that are not on the market yet. So unless you are either very good at guess ing the value of the pipeline products or are very confident about management, it is very difficult to really asses the business.

 

True to an extent, but remember, they are also the gatekeepers of having therapies and drugs approved by the FDA. The intrinsic value of this is quite high.

 

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