VALUATION HIGHLIGHTS

1. Other Pharma & Consumer constitutes 48% of the Trefis price estimate for Pfizer's stock.
2. Oncology Drugs constitute 18% of the Trefis price estimate for Pfizer's stock.
3. Anti-Infective Drugs constitute 17% of the Trefis price estimate for Pfizer's stock.

WHAT HAS CHANGED?

Coronavirus Crisis Impact On Pfizer's Stock

Pfizer lost more than 28% – dropping from $39 at the beginning of the year to around $28 in late March – then spiked 45% to over $41 now. That means it has recovered to the levels where it started the year.

Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery. Investors are now expecting a quicker economic rebound with economies opening up gradually, which will bode well for pharmaceutical companies, such as Pfizer. It is also nearing the launch of its vaccine for Covid-19.

Q3 2020 Performance

Pfizer's top line declined 4% to $12.1 billion in Q3 2020, as 3% growth in the Biopharma segment was more than offset by an 18% decline in the Upjohn segment, due to generic competition for Lyrica. Also, no consumer healthcare revenues, as the company closed the transaction of forming a jointly owned consumer healthcare arm along with GSK. The bottom line of $0.72 per share on an adjusted basis was down 3% from the $0.75 figure in the prior year quarter.

Biosimilars Growth

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 approvals of biosimilars in the U.S., are likely to pave the way for further drugs. Pfizer has received FDA approvals for multiple biosimilars, including ones for blockbuster drugs, Humira, Rituxan, Avastin, and Herceptin, among others. This will likely result in strong sales growth over the coming years.

Generic Medicines Business Merger

Pfizer has announced that it plans to merge its established pharmaceuticals business, also known as Upjohn, with that of Mylan's, in a reverse Morris trust transaction. The combined entity could generate sales of over $20 billion by 2020, and Pfizer will hold a 57% stake in the new company, with Mylan holding the rest.

Consumer Healthcare Business Merger

GlaxoSmithKline and Pfizer will merge their consumer healthcare divisions in a joint venture. Pfizer will own 32% stake in the new entity. The deal was closed in 2019. The combined sales were north of $13 billion in 2019, and the new entity will command a share of over 7% in the over-the-counter market.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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 has received approvals for some other biosimilars, including ones for Avastin and Herceptin. It is already seeing growth from its biosimilar for Remicade. 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 biosimilars. This assumes that biosimilars will be priced 20%-30% below patented drugs. However, 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 several new drugs with combined peak sales estimate of over $12 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 over 10% upside to our price estimate.

BUSINESS SUMMARY

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 injectables, and consumer healthcare. Apart from this the company also reports revenues from alliances.

SOURCES OF VALUE

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 injectables, 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 $19.9 billion in 2018 accounting for nearly 35% 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 injectables 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 injectables and biosimilars (Hospira was the first to launch biosimilar 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.

KEY TRENDS

Coronavirus Impact

The current coronavirus crisis is impacting pharmaceutical companies on two fronts, 1. supply chain disruptions, and 2. direct sales, due to postponement of minor health related issues and surgeries. Though Pfizer in its Q1 2020 earnings call conference stated that it is not seeing any supply disruption. On the positive side, pharmaceutical companies are also busy developing a vaccine for Covid-19. Pfizer is working with BioNTech SE to co-develop and distribute a potential coronavirus-based vaccine.

Consumer Healthcare Business Merger

GlaxoSmithKline and Pfizer will merge their consumer healthcare divisions in a joint venture. Pfizer will own 32% stake in the new entity. The deal closed in H2 2019. The combined sales were over $13 billion in 2019, and the new entity will command a share of over 7% in the over-the-counter market.

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.