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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:
More than expected biosimilar success
- Revenue from Other Pharma & Consumer: Pfizer's acquisition of Hospira could be seen as a big bet on biosimilars. The company is currently testing some biosimilars for Remicade, Rituxan/MabThera, Avastin 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%. If the company exceeds our expectations and sees unprecedented success in biosimilars market, it could add nearly $5 billion over our current estimates leading to nearly 10% upside to our Trefis price estimate for Pfizer.
Phase 3 pipeline fires
- Pfizer's Oncology Drugs Revenue, Neuroscience Drugs Revenue and Cardiovascular Drugs Revenue: Pfizer's pipeline is reasonably strong. The phase 3 oncology pipeline has 3 drugs with combined peak sales estimate of $6 billion. Overall, the the company has 10 drugs in phase 3 which can bring in combined peak sales of $12.5 billion. Our valuation reflects probability adjusted revenues assuming 50% probability of phase 3 drugs reaching commercial launch stage. However, if all phase 3 drugs are approved within the next 3 years, it could imply 10% upside to our price estimate.
Oncology phase 3 drugs
- Avelumab: It is being co-developed with Merck, Germany. The drug is being tested across 7 tumour types and could be filed for FDA approval by 2017. We believe it could generate nearly $2 billion in peak sales.
- Dacomitinib: This is a pan-HER inhibitor and a small molecule drug, and is being tested for advanced non-small cell lung cancer. It could be filed for FDA approval by 2019 and could generate estimated peak sales of $1 billion.
- Inotuzumab Ozogamicin: The drug was filed for FDA approval in June,2016 and received breakthrough therapy designation in 2015. It is aimed at treatin acute lymphoblastic leukemia, which can be only treated through long term chemotherapy. If approved, it could generate peak sales of $3 billion.
Cardiovascular phase 3 drugs
- Bococizumab: The drug is expected to be filed for FDA approval in 2019. It has already shown successful results in reducing cholesterol levels significantly. The company is testing it for the treatment of Hyperlipidemia and reducing the risk of heart attacks. If approved, it would be competing with similar drugs from Amgen, Sanofi and Regeneron which have struggled to gain traction. If successful, the drug could generate peak sales of $2 billion.
- Rivipansel: This drug is aimed at treating patients suffering from sickle cell disease who are hospitalized for vaso-occlusive crisis. This is a rare condition and we expect the pricing to be high. The drug is expected to be filed for FDA approval by 2018, and has potential of generating $1 billion in peak sales.
Neuroscience phase 3 drugs
- ALO-02 Oxycodone-naltrexone core: It is a small molecule drug and is currently under FDA review. If approved, it could be launched by the end of 2016 or early 2017 for the treatment of severe pain, and can generate $1 billion in peak sales.
- Tafamidis Meglumine : The drug is being tested for the treatment of a rare diseases known as Adult Symptomatic Transthyretin Cardiomyopathy. It could be filed for FDA approval by 2017 and has a potential to generate peak sales of $0.5 billion.
Alimentary and Musculoskeletal phase 3 drugs:
- There are three drugs in this category including MOD-4023, Ertugliflozin and Tanezumab. These could be filed for FDA approval by 2018. If approved, they could generate peak sales of $2.2 billion.
R&D rationalization fails
- Pfizer's R&D Expenses as % of Gross Profits and Pfizer's Gross Profit Margin: Pfizer's adjusted EBITDA has fallen significantly in the last couple of years. 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 development 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%.
Pfizer is 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 and went on to acquire Hospira in 2015 which positions it strongly in sterile injectibles and biosimilars market.
The company reports its results primarily in the following segments: 1) Innovative products business 2) Established products business
Innovative products business includes relatively new or growing drugs which are still patent protected. These drugs span across multiple therapeutic areas including oncology, anti-infectives, immmunology, cardiovascular, metabolism, musculoskeletal and others. Its established products business includes drugs that have gone off patent in one or more major markets (U.S. or EU), products acquired from Hospira acquisition including biosimilars and sterile injectibles, and consumer healthcare. Apart from this the company also reports revenues from alliances.
The biggest contribution to the value of the stock comes from the Other Pharma and Consumer segment which includes revenues from Pfizer's alliances with other companies, legacy pharma products, sterile injectibles, biosimilars, consumer healthcare, infusion systems and other drugs not reported separately. This is due to the following reasons:
A big chunk of Pfizer's revenues comes from this segment
The revenues for 'other pharma and consumer division' stood at $14.33 billion in 2015 accounting for nearly 30% of Pfizer's overall revenues. This can be attributed to the fact that the company's legacy pharma products, its revenues from alliances, its consumer healthcare division and sterile injectibles business, each are quite size-able.
Despite already being huge, the revenues from 'other pharma and consumer' are likely to grow
This division has been significantly strengthened by the acquisition of Hospira in late 2015. We expect Pfizer to leverage Hospira's competency in sterile injectibles and biosimilars (Hospira was the first to launch biosimialr version of Remicade) to offset the decline in legacy pharma products. In fact, Pfizer has biosimilars for blockbuster cancer drugs Avastin, Herceptin and Rituxan in phase 3 trials currently.
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.
Biosimilars gaining traction
Previously, Food & Drug Administration Authority (FDA) did not have a process to grant approvals for Biosimilars. However, recent approval of biosimilars in Europe and the FDA approval of first biosimilar in U.S. are likely to pave way for further approvals. Pfizer is focusing on developing biosimilars and its acquisition of Hospira will bolster that effort.
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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