Long Pitch- Pfizer (PFE:NYSE)

Summary

Pfizer (PFE) is an undervalued biopharmaceutical giant currently trading at ~2x sales. This pitch argues for a long position with potential upside of ~190% based on a robust DCF, undervalued research pipeline and excessive market pessimism regarding COVID revenues declines and patent cliffs. Our from-scratch quarterly three-statement model with a DCF valuation is linked below.

PublishablePFEpitch.xlsx

Download XLSX • 155KB

Ticker 

PFE (NYSE) 

Background 

Pfizer is an American biopharmaceutical company that researches and produces pharmaceutical products. Founded in 1849, Pfizer is a blue-chip enterprise with a 40+ year history of consistent dividend payments. Over the past five years, revenue has been driven by Pfizer’s COVID products, namely Comirnaty (vaccine) and Paxlovid (antiviral). Pfizer is currently in a transition period, pivoting towards targeting rare diseases and unmet clinical needs, though this pipeline is yet to offset revenue erosion since Pfizer’s COVID era. 

Pfizer is currently trading at $22.14, down ~60% from its ATH of $58.71 in 2021 Q4, where it was priced at ~13x EBITDA and ~4x sales, supported by a year-on-year revenue growth of ~7% and a gross margin of ~60%. 

This price collapse reflects reduced demand for COVID products and looming patent expirations, which threaten revenue from key non-COVID drivers. 

Recommendation 

We recommend a long position at the current valuation of ~2x sales, which we believe is likely to yield ample upside over the next 18 months. Our base case price target is $69.65, with a weighted average DCF value of $64.88. A conservative comps-based valuation yields $35.42, still implying ~59% upside from the current price.  

Differentiated investment thesis: 

1. COVID revenue declines:  

The market is overly focused on declining COVID revenues, distorting the overall earnings impression.  Non-COVID revenues have displayed ~5.5% mean QoQ growth since Q1 2022, illustrating a strong recovery which is currently underappreciated. 

2. Impending patent cliffs:  

Whilst major revenue drivers such as Eliquis (anticoagulant) face patent cliffs, we believe the speed and impact of these expiries are overestimated. Pfizer’s strong M&A capabilities, alongside existing patent extension applications, position Pfizer strongly to manage and mitigate revenue erosion through legal defence and pipeline augmentation. 

3. Research pipeline: 

Pfizer’s research pipeline is overlooked, displaying an unprecedented end-end success rate of ~17% versus the industry average of ~10%. Pfizer is strategically targeting unmet clinical conditions such as Lyme disease, with ~600M TAM, ~6.5% CAGR and potential market penetration of ~40%, whilst competitors target increasingly saturated markets such as obesity treatment. 

Catalysts: 

1. COVID declines largely priced in: 

Current valuation reflects COVID drag, with residual revenue volume from Paxlovid and Comirnaty likely to provide a comfortable revenue floor. 

2. Phase III clinical trial results: 

Upcoming clinical trial results in key clinical areas such as oncology and rare diseases may significantly re-rate market expectations by altering investor sentiment, especially as these areas fulfil unmet clinical needs. 

3. Accelerated market penetration via fast track: 

Pfizer currently has eight Phase III assets with FAST TRACK designation, which are expected to benefit from prioritized FDA review and approval, accelerating the timescale to potential revenue generation. 

Risks: 

1. Clinical trial failures: 

Pfizer is targeting novel territory in its pursuit of untreated diseases and alternative drug classes (PROTACS). This creates potential for clinical trial failures and an inability to realise revenue, as well as deterioration of investor sentiment. 

2. Inability to fend off patent falloff: 

Pfizer is currently in litigation attempting to extend patent exclusivity periods. The possibility of failure would represent both significant revenue erosion and sunk costs. This may negatively impact future margins and lead to overall decline. 

3. Manufacturing risks: 

Despite Pfizer’s unique edge due to US manufacturing capability (13 current sites), it may prove costly to shift manufacturing over and significantly erode operating margins. 

 Whilst these risks may impact downside, the current price largely reflects such worst-case scenario scenarios. 

Relative valuation and industry outlook 

Pfizer trades at <9x EV/EBITDA across all scenarios, reflecting material discount to Comparable pharmaceutical companies (table 1): 

Table 1: Comparables analysis: 

This analysis suggests a fair value per share of ~$35.00 (59% upside versus current price). This discount reflects Pfizer’s current position in the patent cycle- approaching expiration across several key products- but we believe this is excessively discounted by the market. 

Industry tailwinds: 

AI-driven R&D productivity: Increasing adoption of artificial intelligence in drug discovery and clinical trials improving efficiency and compacting development timelines. 

Demographic trends: Aging population and rising incidence of chronic and rare diseases are boosting long-term demand for biotherapeutics, particularly in oncology and specialty care. 

Industry headwinds: 

Tariff risk: Proposed 25% biopharmaceutical import tariff in the US could significantly increase manufacturing costs, operating margins and hinder patient access. 

Policy risk: Regulatory shifts under new administration could lead to underfunding of biopharmaceutical research, particularly vaccine research, eroding related revenues. 

Competitive pressure: Rising competition from innovative biotech startups could erode Pfizer’s market share, particularly in the rare diseases category. 

Intrinsic valuation (DCF): 

Discounted Cash Flow valuation from a quarterly model projected through FY 2030 yields the following valuation estimates: 

Bear: $14.95 - COVID revenue decline, patent erosion and no significant new introductions. 

Base: $69.65 - COVID decline but patent erosion successfully defended through extensions. 

Bull: $74.31 - COVID decline but revenues replaced through patent extension and introduction of novel products. 

These valuations are based on WACC values of 6.00% (Bull), 6.50 % (Base) and 7.00% (Bear), reflecting the likely financial health of Pfizer according to its recovery. A flat value of 1.75% was used for terminal growth, reflecting a conservative approximation of GDP growth in advanced economies. 

This yields a weighted mean share price of $64.88. The $55.00 bear-base spread is not a modelling artefact; it reflects the reality of biopharma investing: economic cycles are almost entirely dependent on patent cliff dynamics. Pfizer is at a transition period between cycles, with successful defences and rollouts of innovative drugs, such as their PROTAC ARV-471 which represents an entirely novel class of pharmaceutical, presenting an opportunity for asymmetric upside. 

Model highlights:

Front page with interactive scenario switch: 

Bull case forecasting with estimated revenues weighted by probability according to estimated clinical trial success probability: 

DCF model based upon quarterly data; sum of free cash flows discounted to present value, added to terminal value (estimated by Gordon Growth Model) also discounted to present value. Enterprise value calculated as the sum of above two, and net debt (FY 2024) subtracted to yield equity value. Equity value divided by current shares outstanding to yield fair value estimates: 

Conclusion 

Pfizer is fundamentally mispriced by the market, overreacting to its declining COVID revenues and potential loss of exclusivity rights to key revenue drivers. An exceptionally strong research pipeline coupled with the capital discipline to fend off revenue erosion positions Pfizer favourably to yield significant upside in the medium term, as the market begins to acknowledge this mispricing. The bear case reflects an unlikely outcome for the blue-chip pharmaceutical giant, whilst the base and bull cases reflect potential for asymmetric upside and alpha generation. 

DISCLAIMER: This is not investment advice nor intended to inform investment decisions, all content is property of Scalpel capital and for proprietary exploration of interests. Complete financial model appended below.