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Investment Overview for Pfizer (NYSE:PFE)
Key drivers of Pfizer's value that present opportunities for upside or downside to the current Trefis price estimate for Pfizer:
Mid-to-late pipeline firing in the next few years
- Revenue from Diversified Legacy Drugs & Alliances, Revenue from Oncology Drugs, Revenue from Musculoskeletal Drugs, Revenue from Ailmentary and Metabolism Drugs and Revenue from Anti-Infective Drugs except Prevenar: Pfizer is confident about its R&D pipeline with renewed focus on growth products. The company has around 10 drugs in phase 3 trials and 12 in phase 2 (important ones). Phase 3 status is interesting as Pfizer is currently testing some biosimilars for Remicade, Rituxan/MabThera and Herceptin. All these three drugs are blockbuster biologics. If biosimilars are approved worldwide, Pfizer could be looking to target a market of more than $15 billion with its phase 3 biosimilars. This assumes that biosimilars will be priced 30% below patented drugs. However, at present, only Europe has an established process to approve biosimilars, though there has just been a single approval in the U.S. As such, the timeframe for approvals is even less clear than normal. Additionally, we need to consider the evolving competition which may bring the prices further down. In fact, some competitors are offering discounts of as much as 70%. Overall, we expect Pfizer's pipeline drugs to bring close to $5-$6 billion over the course of next four years. However, if the company exceeds this expectation, and doubles the revenue from pipeline drugs, it could add approximately 10% to its value. There are reasonable grounds to consider this as a plausible scenario. some of the factors that can fuel this outcome are: 1) the growing market for biosimilars, which could be as big as $20 billion by 2020; 2) the recent acquisition of Hospira (we have not incorporated this in our model yet but will do so once the deal closes); 3) the potential success of Xeljanz and some other phase 3 drugs including a type 2 diabetes drug and possibly a breast cancer drug (phase 3), as well.
R&D rationalization fails
- Pfizer's R&D Expenses as % of Gross Profits and Pfizer's Gross Profit Margin: Pfizer's adjusted EBITDA plummeted by roughly 17% in 2014 despite only 3.8% decline in revenues. This can be attributed to lower gross margins, higher administrative and marketing expenses, and most importantly, a big jump in research and development spending. This is slightly at odds with what one would expect given the company's restructuring program to streamline investment. However, some additional spending related to certain drugs in phase 3 trials (which are the most expensive) and the dveopment deal with Merck KGaA weighed on the company's profits. Pfizer needs its pipeline to be productive considering the large number of its drugs the face strong competition, which justifies its increase in R&D expenses. Going forward, we expect the company to cut back on some of its R&D staff as it continues its restructuring program. However, if this rationalization doesn't yield expected results, the situation can change. Gross profits may continue to decline while Pfizer may have to invest further for innovative therapies. If this pushes its R&D expenditures as percentage of gross profit past 24%, there can be downside of about 10%. This will not only come from increased R&D expenses, but also from reduced gross profits and lower margins.
Pfizer is currently the world's biggest pharmaceutical company in terms of revenues. It was founded in 1849 and went public in 2004. In October, 2009, Pfizer completed the acquisition of pharmaceutical giant Wyeth for $68 billion. The firm operates in two main segments: Bio-pharmaceutical and Diversified. In 2014, Pfizer acquired Hospira, and the deal is yet to be closed. We will reflect the impact of acquisition in our model following the closure.
Bio-pharmaceutical includes the Primary Care, Specialty Care, Established Products, Emerging Markets and Oncology customer-focused units, which includes products that prevent and treat cardiovascular and metabolic diseases, central nervous system disorders, arthritis and pain, respiratory diseases, urogenital conditions, cancer, eye disease and endocrine disorders.
Diversified includes consumer healthcare products such as pain management therapies, cough/cold/allergy remedies, dietary supplements, hemorrhoidal care and other personal care items, as well as nutrition products such as infant and toddler formula products.
The biggest contribution to the value of the stock comes from the Legacy Wyeth & Pfizer products, Alliances and income generated from the Diversified unit. This is explained by the following reasons.
Alliances & licensing arrangements to bolster market share
The vast network of alliances, licensing deals and other forms of joint partnerships that Pfizer has helps reduce R&D expenses. A strong distribution network, tie-ups and brand image due to world class drugs help revenues and increase market share.
Acquisitions to help boost growth at Pfizer
The Synbiotics deal which was completed at the end of 2010 has opened up a new area of growth in veterinary immuno-diagnostics. This market segment was valued around $750 million in 2010 and is projected to grow at a healthy pace annually. The acquisition of Ferrosan's consumer healthcare unit which was completed in December, 2011 will allow Pfizer to expand the marketing of Ferrosan’s brands through Pfizer’s global footprint and provide greater distribution and scale for certain Pfizer brands, such as Centrum and Caltrate.
Loss of patents impacting sales
In the last few years, several blockbuster drugs have lost patent exclusivity which includes Lipitor. This has not only impacted Pfizer, but the pharmaceutical industry as a whole. As a result, Pfizer and other firms will need to focus on growing areas of immunology and oncology.
Growing threat of generic products
The fast growing pharma market in emerging economies or referred to as the 'Pharmerging' economies have the capability and technical prowess to manufacture generic versions of blockbuster drugs. These generic drugs are often sold at prices that substantially cheaper then their branded counterparts, thereby severely affecting big pharma's ability to generate profits in the long run.
Lack of approval for Biosimilars by FDA
At present the Food & Drug Administration Authority (FDA) does not have a process to grant approvals for Biosimilars.
Though its hard to say when such a process would be initiated, the potential impacts would be severe for any big pharmaceutical firm, as Biologics seem to be the last bastion of long term profits for big pharma.
Globalization of healthcare reforms
Governments around the world are trying to rein in fiscal spending in order to manage their budget deficits
Since healthcare costs are one the biggest components of any national budget, it is obvious that increased healthcare legislation and reforms around the world will hurt revenues for the entire pharmaceutical sector.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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