How Sensitive Is Pfizer’s Stock To Its Gross Margin?

At nearly 80%, Pfizer‘s (NYSE:PFE) gross margin is among the industry’s best. The figure for rivals such as Merck (NYSE:MRK) and Bristol-Myers Squibb (NYSE:BMY) stands at around 75%, while Roche’s (NASDAQ:RHHBY) is similarly around 80%. It is interesting to note that despite the fact that Roche enjoys significant pricing power for its biologics – which until now had virtually no generic competition – its gross margin is still just about the same as Pfizer, which doesn’t enjoy that same advantage. Needless to say, Pfizer’s ability to maintain its gross margin is important for its valuation. We have created an interactive model that details how a change in gross margin can impact the company’s value. You can modify assumptions such as projected revenue to see how the dynamics of gross margin / valuation change. The image below shows one of the key steps in identifying Pfizer’s stock sensitivity to change in its gross margin. We detail how change in gross margin impacts gross profit, which then impacts EPS and subsequently, stock price (assuming the P/E multiple doesn’t change).

We find that a 1% increase in Pfizer’s gross margin would imply a nearly 1.2% upside to its one-year valuation, which we estimate using projected EPS and a forward P/E multiple. Our sensitivity analysis assumes that the margin gain would not impact Pfizer’s forward P/E multiple, which currently stands at 13.2 based on Trefis estimate (P/E based on Non-GAAP EPS). However, if you disagree with that assumption, you can make changes to that variable as well.  

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